After 2024 Inflation is under 1% per annum, forever
Stock-to-Flow, a driver of value, doubles every four Bitcoin years
Easy to calculate in Block Time
The Federal Reserve Manages A Debt-Based Fiat Currency
The inflation in the M2 money supply in the US runs about 5% per year. In the last three years it has increased at a 5.0% rate, and in the past year at 6.0%. You may be surprised because you hear that the Federal Reserve is struggling to push inflation up to 2%. Well, that is for the particular core personal consumption price index that they prefer to follow. But the money supply can grow faster than price inflation because the population and productivity grow even while the monetary velocity (turnover rate) has been dropping in recent years.
The Fed seeks to manage inflation and forward expectations for inflation with interest rates, open market operations, and quantitative easing. The Fed’s monetary policies are set by their seven-member Board of Governors, who meet eight times per year.
Now For Something Completely Different
Bitcoin is nothing like that. It has a predetermined monetary policy for the next century and beyond, with no committees of bankers and economists. It is designed as standard money, whereas fiat in various countries is managed by their central banks, and always with political constraints of some sort.
Bitcoin is disinflationary, in fact once the lost coin rate exceeds the new coin rate, it will eventually actually become deflationary. Since it is designed to have a maximum number of Bitcoins ever created, namely 21 million, then it must be disinflationary and the Halving process does that. Currently, there are almost 18 million that has been created by the Bitcoin mining process on the blockchain, so 6/7 of the ultimate supply already exists. The creation of the next 3 million or so is on an ever-tightening emission schedule, which means an ever-tightening monetary policy.
After the beginning of the next century, there is no monetary policy at all, since the last whole Bitcoin will be very slowly minted from around the year 2102 until 2140. There is no policy going forward other than simply that of fixed supply. This is the hardest money ever created by mankind.
The dominant factor in the tightening of the Bitcoin monetary policy is the Halvings that occur every four Bitcoin years. And a secondary factor is the reduction in monetary inflation that would occur simply because the stock of Bitcoin is ever-growing until a century and two decades from now.
What Is A Bitcoin Year (Block Year)?
Bitcoin’s calendar has Block Eras, Block Years, Block Months and so forth, determined by the block count (block height) of Bitcoin’s blockchain. I have elaborated this calendar in the blog Living on Satoshi Time: What Block is it?
Each Halving occurs after 210,000 additional blocks have been created in the blockchain. Each Block Year is 52,500 blocks in duration, each Block Month is 1/12 that length or 4375 blocks. The Block Years vary somewhat from our Gregorian calendar years but recently differ only by about a week or two per year.
Bitcoin miners are rewarded by new coins if they are first to solve the cryptographic problem for the winning block. This is their main incentive (they also earn transaction fees), and it is known as the block reward. Each Bitcoin block is about 10 minutes long and there is a difficulty adjustment process every 2106 blocks (a Block Fortnight). This difficulty adjustment is designed to keep the block time in the vicinity of 10 minutes.
Since everything is pre-determined within the Nakomoto consensus, we can build out a table of past, present, and future monetary stock, supply rate, inflation, and stock-to-flow for Bitcoin. It is more natural if we work in Block time and then this can be translated to regular calendar time, exactly for the past, and estimated for the future.
Stock-to-Flow is the inverse of the inflation rate. It measures how many years it would take to double the money supply at the current rate of annual new supply emission.
Every block in the blockchain (time chain) is timestamped so that one can determine the correspondence to Gregorian calendar time in the past and extrapolate to calendar time for future blocks.
We are now in the third Block Era (third quadrennial period). The history of block rewards is that the reward was originally, from January 2009, set by Satoshi at 50 Bitcoins, then the first Halving cut that to 25 in November 2012 as the block count (block height) reached 210,000. And in July 2016 the second Halving cut the block reward at block 420,000 to its present value of 12.5 Bitcoins.
The block reward will drop to 6.25 at the third Halving expected to occur in mid-May, 2020 and in early 2024 the fourth Halving will drop the reward to 3.125 Bitcoins.
Table 1 illustrates how these successive Halvings drive inflation down very rapidly. Note that inflation is just the inverse of stock-to-flow (S2F). Inflation will be less than 1% from early 2024 as the fifth era begins and the S2F moves above 100. And it will be less than 0.1% from the eighth era beginning 2036, as the S2F exceeds 1000. Bitcoin is destined to be an inflation-free asset, an exceptionally stable currency, and the hardest form of money ever created.
The forward-looking S2F (last column of Table 1) can be calculated at the beginning of each new Block Era according to the formula S2F = 4 x (2^E — 2) and the prior S2F is one-half of that value. Each Block Year between Halvings, S2F increases by 1. So it is all calculable in advance. The only uncertainty is exactly how Block Year boundaries relate to our calendar years.
Buy Bitcoin, They Aren’t Making Any More After 2140*
*This is not investment advice.
You know the expression “Buy land, they aren’t making any more of it.” Although there is quite a lot of land on planet Earth, some 57.3 million square miles although 57% is uninhabitable desert or mountain land. The inhabitable area is 24.6 million square miles or almost 16 billion acres.
Bitcoin is rarer. There is less than 1 Bitcoin per square mile of habitable land (for reference there are 2.59 square kilometers per square mile).
There will be 32 Halvings of the Bitcoin supply rate in total, tapering the supply every four Block Years, until around the year 2140, when the total number maxes out at 21,000,000 Bitcoins. And then that is it, no more Bitcoins will ever be created. In fact, the last full Bitcoin will take an exceedingly long 38 calendar years to create (small fractions each year of course)! Even halfway out from now until mining ends, i.e. 60 years from now in the year 2079, we will be down to the last 100 Bitcoins ever to be created.
All gold in existence is some $8 trillion worth. For gold, the stock-to-flow (S2F) is around 54, since new mined supply rises at around 1.9% per year. Among precious metals, gold has the highest S2F, and this is a driver of value. The total market values for precious metals gold, silver, platinum and palladium adhere to a power-law relationship of S2F to the 5/3 power, based on an analysis by the anonymous PlanB.
For Bitcoin, the current inflation rate is about 3.7% and the S2F is 27, not yet as large as gold’s but headed toward being very much larger than gold. Next year there is a Halving that will occur on May 2020 and that will drive Bitcoin’s S2F to 56, about the same as that of gold, and that implies supply inflation of 1.8%, much lower than for the USD.
Bitcoin Price’s Power Law Trajectory
During its history, the Bitcoin price has climbed steeply as the blockchain has grown. We have fit a power-law relationship P ~ (Byr)^k where P is price, Byr is the number of elapsed Block years, and k is the power-law index.
Table 2 uses Block year half-year price intervals from highcharts.com, at each 6 Block months. The next to last column shows the power-law index (slope in natural log-log space); it has been close to 5 for the last five years.
The slope or power-law index over the full range from Byr of 2 when prices started to be readily available until now is about 5.3.
We would like to understand how much value comes from the stock-to-flow and how much comes from Bitcoin’s ever-increasing security. Our thesis is that Bitcoin follows a double feedback loop of increased security as the blockchain grows, leading to a higher prices, leading to higher hashrate, which increases security.
And increasing S2F means increased scarcity, and that also drives the price higher.
We also assert that it makes more sense to analyze price and other relationships in the fundamental temporal basis vector for Bitcoin, Block time. The fundamental driver is the lengthening of the blockchain; Bitcoin defines its own calendar. After analysis, one can then convert to the Gregorian calendar.
We argue that the price cannot rise with S2F for another decade or two in a power law fashion. S2F itself is already an exponential (!) with blockchain height, running as ~ 4 * 2^E in the limit, while E itself is simply int(B/210000) + 1. So the implication is for price rising as a power law of an exponential of Byr (or block count), which cannot persist for a very long time.
In fact, PlanB’s model has Bitcoin’s market cap rivaling that of all gold within 5 years. And then it goes on to quickly subsume the value of all currency in circulation by the subsequent halving.
What we would like to begin understanding is how Bitcoin’s market cap will flatten from a steep power law relationship with the Blockchain length, as its inflation drops to zero. Will it asymptote toward a stable, possibly very large, value? And will that value be comparable to all gold, or all base money in the world (around $20 trillion according to @crypto_voices tabulation), or something smaller or larger?
The first implies a Bitcoin price heading to $400,000 and the latter a price of $1 million.
What will drive investment flows into Bitcoin from traditional holdings? What will the market pay for ever-increasing scarcity and security, a harder currency than mankind has ever seen?
We don’t yet have the data we need, but we are on the most interesting ride into the future with Bitcoin.
Today is Block Year 12, and within the year it is Block Day 131, within Block Month 5
Bitcoin Generates its own Calendar
Our Gregorian calendar is based on the Solar year, the Lunar month, and the Terrene (Earthly) day. Bitcoin has its own natural calendar that can be constructed to approximate our human calendar of years, months, and days.
But the details are a bit different, and since Bitcoin is a dynamic process built around the construction of blocks, block count, not regular calendar time, is the most relevant and precise way of looking at the passage of time in the Bitcoin context.
Bitcoin’s fundamental process driver is the construction of a chain of blocks. Blocks are created one at a time and chained together in a time chain, or blockchain. That process and the ever-growing chain drives Bitcoin’s security and its value. The value comes both from security and scarcity, and the money supply is created on a per block basis, via a block reward for the winning miner.
The block count is the clock. It is the system’s heartbeat. Bitcoin has its own clock that has a rough correspondence with wall clock time. Yet it has its own cycles, years, months and days of somewhat different and varying duration from regular time but with an approximate correspondence.
I now describe a natural Bitcoin calendar system, based on the block length at the short end, the difficulty adjustment in the mid-range, and the Halving cycle at the long end.
We designate block height or block number by the variable B.
The first year is designated Year 1, Anno Satoshi, 1 A.S. and it originated with the first block B = 1 that was completed on 9 January 2009.
Block Year, Block Month, Block Day and more
So now let’s look at the Block Era, Block Year, Block Quarter, Block Month, Block Fortnight, Block Week, Block Day, Block Hour, and Block Minute. They are roughly equal to our familiar calendar and time intervals, but not precisely.
Bitcoin is a dynamic process creating blocks approximately, but not exactly, every 10 minutes. So BlockTime will deviate from wall clock time. There is a self-correcting process within the Nakamoto consensus algorithm that is called the difficulty adjustment, and which occurs every 2016 blocks; this is approximately every two weeks of wall clock time. Increasing or decreasing the difficulty regulates the block interval back toward 10 minutes’ duration.
The block duration and the difficulty adjustment are two of our pegs for the Bitcoin calendar system.
The most important aspect of Bitcoin’s monetary policy are the Halvings, which occur every 210,000 blocks. The block subsidy (mining reward) is cut in half after each 210,000 blocks, which also roughly equals a four-year period.
The formula for Bitcoin supply creation and Halvings, denominated in Satoshis (each Bitcoin contains 100 million Satoshis). The original reward was 50 Bitcoins with Blocks 1 through 209,999 and then cut to 25 Bitcoins from Block 210,000 through 419,999 and so forth.
No need to memorize the formula!
Block, Difficulty, Halvings Define the Calendar
So these three pegs of block (Earthly: around 10 minutes), difficulty adjustment (Lunar: around two weeks), and Halvings (Solar: around four years) allow us to define a Bitcoin calendar system.
The calendar begins with B=1 on January 9, 2009 and that initiates the Age of Satoshi. Years are rendered as A.S. (Anno Satoshi), counting begins at year one. We are now in the 12th BlockYear, the last year of the third Reward Era.
Months and weeks are numbered from 1 to 12 and from 1 to 52, respectively, within a year. Like the Gregorian calendar there are precisely 12 months, but the calendar has slightly more than 52 weeks.
It is easy to determine the natural rhythm of the Bitcoin calendar. Rows in italics are the three pegs we build the system around.
Block Century = 5,250,000 blocks (25 Eras, 100 Block years)
Block Era (Cycle, Reward Era) = 210,000 blocks
Block Year = 52,500 blocks (one quarter of a Block Era)
Block Quarter = 13,125 blocks (one quarter of a Block Year, or three Block Months)
Block Month = 4375 blocks (1/12 of a Block Year, and unlike Gregorian calendar, all of equal length)
Block Fortnight = 2016 blocks (the difficulty adjustment period, and two Block Weeks)
Block Week = 1008 blocks (52 weeks plus a bit in a year, not unlike the Gregorian calendar)
Block Day = 144 blocks (1/7 of a Block Week, 24 Block Hours)
Block Hour = 6 blocks (nominal block time is 10 ordinary minutes)
Block Minute = 0.1 blocks
We can refer to these either as BitYear, BitMonth, BitWeek, BitDay, BitHour, etc.,
We will see what the community gravitates toward. And in either case the abbreviations can be:
Solar: BCentury, BEra, BYr, BQ
Lunar: BMo, BFort, BWk
Terrene: BDay, BHr, BMin
Here are the formulae for the longer intervals
BCentury = int(B/5,250,000)+1
BEra = int(B/210,000)+1
BYr = int(B/52,500)+1
Within a given year, the quarter and month number are given by:
BQ = 1 + int (B/13125) – 4 * (BYr – 1)
BMo = 1 + int (B/4375) – 12 * ( Byr – 1)
One good thing is that we have no leap years, although there are definitely parties at each 4 BlockYear interval for Halving Day.
The BlockYear has 52 weeks plus an extra short day of 84 blocks (14 BlockHours). It also has exactly 12 BlockMonths. The BlockMonth has 30.382 days, or 30 days plus a short day of 55 blocks (9 BlockHours and 1 additional block).
Example: Block #596323 at 23 Sep 2019-09-23 04:09:32.
and the block corresponds to the 10th fortnight, the 19th week, and 131th day of Byr 12.
A more accurate Basis for analysis
I suggest that it is much more natural, appropriate, and accurate to do price, market cap, hashrate, transaction value and other studies on a Bitcoin Calendar basis, in order to examine correlations and co-integrations of these quantities with a time related variable.
The results can then be converted to regular Gregorian calendar time after the analysis for presentation purposes.
Have a nice Block Day! BYr 12-131(5) A.S. Notation: BYr-BDay (BMo)
After 10 years of existence, and having increased in price by a factor of a million or so even while supply increased by a factor of seven, Bitcoin has crossed the chasm. Ironically, Facebook supplied the final push when they announced their Libra plans on June 18th.
Bitcoin’s high value is founded on two very strong attributes: security and scarcity. In addition it is highly divisible, fungible, and easily and rapidly transportable across the world. But there are thousands of cryptocurrencies that have those latter attributes. Yet they each have a small fraction of Bitcoin’s value. In fact about 2/3 of the value of all cryptocurrencies combined ($300 billion, approximately) is found in Bitcoin alone, at roughly $200 billion.
How can the price increase in a decade by a factor of a million even as supply went up? Because hashing rate, that drives up security, has increased even more, around a factor of a trillion. This made Bitcoin much more desirable to hold as a store of value.
Security comes from hashing power applied to the mining process. Cryptocurrency mining via Proof of Work is the most effective consensus algorithm to maximize security for a decentralized accounting ledger. This computational hashing power is in the form of specialized ASIC hardware specifically designed for rapidly calculating the Proof of Work algorithm.
Bitcoin has steadily grown to an enormous 70 Exahashes of hashing power deployed around the world. That is 70 million trillion hashes per second. The hash rate has grown by a factor of 1000 in the past five years, with more mining pool nodes and better hardware.
The coin with the second position in hash rate, Bitcoin Cash, a clone or hard fork of the original Bitcoin, has only 3% as much hash rate.
There is that much computing power directed toward solving the cryptographic puzzle, and with the winner claiming the current block reward of 12.5 Bitcoins each 10 minutes or so. Some $19 million is mined per day, at the current price of $10,750 thus it is worth throwing lots of compute power into the solution.
Security can be measured by how much it costs to mount a 51% attack on Bitcoin. It costs around $1 million to rent enough compute power for an hour of mining; this would allow a counterfeiter to double spend, but the value of double spent coins would be less than the rental expense.
A 51% attack would not invalidate ledger entries that contain your Bitcoin received yesterday or five years ago, just as a new counterfeit dollar does not replace your existing one. The clever design of the Bitcoin blockchain means that each ten minute block added after a particular block increases the security of that particular block exponentially.
The more hash rate, the more security.
While some have criticized Bitcoin’s electricity consumption, roughly equivalent to Ireland’s needs, the conversion of electricity to secure information is at the heart of what provides Bitcoin value. The electricity is not wasted, energy is encapsulated as value; electrons are turned into secure bits. The electricity used in Bitcoin mining should be compared to the much greater use of electricity and energy in gold mining, for example, or in the offices and computational facilities of the banking system.
Furthermore, 74% of Bitcoin’s electricity is from renewable supply, especially hydropower.
The world has never seen a form of money with scarcity as great as that of Bitcoin. To be money, one requires divisibility for a standard unit of account, and stability in the supply.
Gold coins and silver coins have been used in the past because of the relative scarcity of these precious metals, formed only in supernovae. Gold, unlike silver, does not increase in quantity much each year since most gold ever mined is still around in the form of jewelry or bars or coins. The supply rate increase is around 1.6% per year. Historically, large new discoveries made a difference, but those days seem to be behind us. Asteroid mining of gold is decades into the future.
The yearly increase in supply depends on how the price for gold moves, mining discoveries and development, and the cost of energy and other inputs to the mining process. But the supply increase is rather stable. There are total above-ground stocks of around $8 trillion. One-quarter of that, some $2 trillion, is held by central banks around the world.
Governments have moved away from the gold standard during the last century, and all government issued money is now fiat fractional reserve currency, issued as debt. The supply is influenced by (and sometimes more directly controlled by) committees at the central bank through monetary policy. The increase in supply of dollars currently runs at over 4% per annum. Consumer price inflation is lower, around 2%, due to productivity increases in the economy.
Bitcoin new supply each day and each year is not determined by committees of Ph.D. economists and bankers, as in the case of fiat, nor influenced by its price, as in the case of gold! If the amount of hashing power drops in response to a price drop, the Bitcoin mining difficulty that is embedded in the algorithm automatically decreases and there is still one new block issued every 10 minutes on average, containing the equivalent of 12.5 shiny new Bitcoins.
Bitcoin’s supply increase is all baked into the Nakamoto consensus: there will be at most 21 million Bitcoin ever issued, and that final number is not reached for another 120 years. However, current supply is already at 17.8 million Bitcoins, so there are only 3.2 million more that will ever be created.
The limited supply does not restrict Bitcoin’s use as a medium of exchange since each Bitcoin can be subdivided into 100 million units of Satoshis (sats). Thus even if Bitcoin reached $1 million in price, each sat would be worth just a penny.
Approximately every 4 years the supply issuance rate is cut in half by means of cutting the block reward in half. These quadrennial events are called Halvings (or ‘Halvenings’). That means inflation decreases continually as (a) the stock grows, and (b) the rate of new coin issuance decreases. At the next Halving the block reward (block subsidy, formally) will decrease to 6.25 Bitcoins from the current 12.5 reward. At the Halving after that it will decrease to 3.125 Bitcoins per block.
While in its early years the supply increase rate was quite high for Bitcoin, now it is at a reasonable 3.8%, less than the US dollar supply increase of over 4%. And at the next Halving in May 2020 it will be cut to 1.8%. (The rate drops more than by half since the existing stock is growing every 10 minutes as well). By 2024, the inflation rate will drop under 1% and it will continually decrease inexorably toward zero.
Bitcoin supply gets tighter and tighter, unlike fiat currencies with continued variable inflation and the risk of inflation getting out of control.
PlanB has built a very nice model of Bitcoin price vs. scarcity, using stock-to-flow ratios, which represent the inverse of the annual percentage supply (flow). Existing stock refers to the total number of Bitcoin ever mined. Flow is the new supply rate. Thus stock-to-flow is the number of years’ of supply, at current rates, that would be required to double the outstanding stock.
Bitcoin will never, ever, double its outstanding stock, because stock-to-flow keeps tightening in the hard-coded Bitcoin supply algorithm. In the PlanB model, price correlates very well, at 95%, with a high power of the stock-to-flow variable, roughly the cube of that ratio. Bitcoin’s stock-to-flow will double, and be close to gold’s as of next year. And since market cap (value of all Bitcoin) has correlated with such a steep power law, this is a big deal.
Double feedback loop
The beauty of Bitcoin’s design is that security and scarcity work together in a self-reinforcing pair of cooperating feedback loops as shown in the figure below.
In the upper loop, we are indicating that Bitcoin is already scarcer each year relative to increasing dollar supply, and as of next year’s Halving, it will be continually scarcer relative to all fiat currencies and match gold as well. This increased scarcity drives price higher.
In the lower loop, we are indicating that higher prices encourage more mining power, more hashing power, and that increases security. Increased security drives prices higher.
And thus scarcity increases security. And increases in both work to increase the price.
The long term outlook is excellent. Volatility is high at present due to a relatively thin market compared to gold, currencies, and Facebook or Apple stock. It will decrease with time as more value is captured into Bitcoin.
Asset or debt?
All fiat currencies represent debt. Fiat currencies are issued in exchange for debt of individuals, corporations, or governments.
Facebook’s Libra is a debt-based token. It is a so-called stable coin backed by a basket of fiat currencies, which themselves represent debt. Money Creation 101: a bank makes a loan and new money is created; a central bank buys a treasury bill and new money can be created. There is no limit to the amount that can be created (apart from likely regulatory restrictions); it will be created and destroyed relative to demand.
Libra has a model of centralized security, managed by an Association of some 28 companies, and it has no scarcity other than that of the reserve basket of fiat currencies that back it. Libra cannot increase in value, rather its value inflates away along with the Dollar, Euro, Yen, and Pound components of the basket. Bitcoin is an asset, a pure asset with no associated debt. Like gold it comes into existence by a mining process, but mining occurs on computers rather than from the ground. If there is a debt crisis or banking crisis, Bitcoin is not affected, in fact, it would be sought after. Bitcoin was created by Satoshi Nakamoto in 2008/2009 in large part as a response to the debt crisis that brought on the Great Recession a decade ago.
Store of value or medium of exchange?
Money must be a store of value, a medium of exchange, and a unit of account. The default unit of account around the world is the US dollar, but the other main currencies such as the Euro, Pound, Yen, and Yuan are major units of account.
All of the over 100 fractional reserve currencies score highly in the medium of exchange category, at least within their own borders. They do not store value for the long term, losing half their value every decade or two or three depending on the strength of the particular currency and varying inflation rate.
Bitcoin is designed, like gold, first and foremost as a store of value, with its very constrained monetary supply. Its monetary policy is even superior to that of gold, and completely defined in advance.
No other money has ever had its monetary policy for the next hundred and even thousand years laid out in advance. Gold was the closest, but new mine discoveries always added major supply increases.
Bitcoin has been criticized on the medium of exchange front, but it is improving in that regard as well. First, remember that it is subdivided into a hundred million sats, so small quantities are not a problem. Fees are sometimes high, but trivial if you are moving large amounts, and much less expensive than the costs of bank wires or moving gold. Transfers are much more rapid, occurring within an hour for sufficiently secure confirmation.
The Lightning network and other second layer solutions such as wrapped Bitcoin (ironically using Ethereum ERC20 tokens) are making Bitcoin more accessible for small purchases by allowing transactions to be handled off-chain and later settled in bulk back to the Bitcoin blockchain.
Government reaction to Libra
Theannouncement of Libra by Facebook and the group of companies known as the Association in mid-June has thrown governments into a tizzy. In the US, the Federal Reserve chair, the SEC chair, the Treasury Secretary and even the President all weighed in with their opinions. The net-net of comments were that Libra needs to be closely regulated, certainly with respect to KYC/AML (know your customer and anti-money laundering), and President Trump, presumably at Secretary Mnunchin’s urging, said they ought to be required to obtain a banking license. Secretary Mnunchin expressed the usual money laundering concerns.
Hearings before Congress were quickly scheduled and took place in the Senate and House mid-July. David Marcus, who leads Libra development at Facebook’s Calibra subsidiary, testified. He was not especially forthcoming on whether Facebook will be able to restrict some users from access to the Calibra wallet, and had limited information about the Association. The other members of the Association have only signed letters of intent; the charter is not yet ratified.
Congressperson Waters, who chairs the House Financial Services committee, has called for a pause in development until reviews can be completed. Marcus declined to commit to this, or to a preliminary sandbox environment working in conjunction with regulators. A bill has been introduced in Congress that would outright ban Libra, but this seems unlikely to pass.
The IMF, European Central Bank, and other central banks are almost panicking at the prospect of a competitive global currency. The UK Parliament will schedule hearings. The French Finance minister said Libra must not be allowed. India is foolishly trying to outlaw cryptocurrency completely. The Chinese central bank has announced they will develop their own central bank digital currency; they also just published a guide to Bitcoin.
Now what is interesting is that in the US, the Administration, the Fed, and Congress are beginning to draw a clear distinction between Libra, which is corporate money, and one might argue a shadow banking system, and Bitcoin, which is private money, with no centralized control.
It is encouraging for Bitcoin that some Congresspeople get the difference. In fact Congressman Patrick McHenry stated “I think there’s no capacity to kill bitcoin. Even the Chinese with their firewall and their extreme intervention in the society could not kill bitcoin.”
Regulation is already generally in place in the US for Bitcoin and cryptocurrencies more broadly. The SEC is restricting and regulating new cryptocurrency token offerings ICOs and are looking at Bitcoin ETF proposals. The SEC have stated that Ethereum and Bitcoin are not under the purview of ICOs, essentially recognizing the private money nature of the way they were created. (Ethereum is more problematic since they wish to move to Proof of Stake in the future). The CFTC has approved futures trading in Bitcoin. The IRS has been treating cryptocurrencies as assets taxable for capital gains purposes.
So there is no prospect for banning Bitcoin in the US and probably not in most Western countries or Japan and Korea. A Chinese court upheld property rights for holding Bitcoin in July. Although some mining restrictions have been placed in China, this seems more about managing electricity usage and even theft rather than an outright ban on cryptocurrency mining. Iran has recently legalized cryptocurrency mining.
In sum, the reactions of the US government and other governments toward the Libra announcement indicate a desire to closely regulate this corporate money style of ‘cryptocurrency’. This is especially the case since Libra is from a large social media company already under fire for data privacy breaches and whose scale of billions of potential Libra users could pose a systemic threat to central banks’ management of their national currencies.
As Libra is slowed down by regulations in various nations, Bitcoin is unimpeded. As governments recognize the difference between a corporate money (with Libra being a product an association of corporations) and Bitcoin’s private money nature, Bitcoin benefits.
One can argue that all of the attention given to Libra with the announcement and to cryptocurrency more broadly, along with the realization that Bitcoin cannot be stopped,has provided a push of Bitcoin across the Chasm, with Libra’s help even though Libra itself is is not scheduled for release until 2020.
Chasm is crossed by Bitcoin: 20 reasons
1. Bitcoin has been around for 10 years, since early 2009, and has increased in price by six orders of magnitude since April 2010, even as supply increased seven times.
2. Bitcoin has been through two Halvings; the next is only 10 months from now; this is the fundamental driver of scarcity with fully predictable inflation headed under 2% and then under 1% . Supply is now tight and only getting much tighter.
3. Bitcoin suffered through the crypto winter of 2018 and bounced back by a factor of over three times in price since the start of 2019. It has moved back above $10,000 with prospects for $50,000 plus within the next year or so due to the forthcoming Halving (PlanB model of stock-to-flow projection yields the future price estimate).
4. Bitcoin has an enormous lead in security over all other cryptos with far and away the greatest amount of hashing via specialized ASIC accelerated computers.
5. There are some 32 million Bitcoin wallets held by perhaps 10 million people; while it now has significant presence, there is also huge room for growth.
6. Facebook’s Libra has put the Fed, Congress, Treasury Department, SEC into a tizzy. Also the IMF, ECB, Bank of China and other central banks are more or less panicking around the challenge of global digital currency alternatives. The IMF is creating a series of papers to look at alternatives that could include holding e-money ‘stablecoin’ currency reserves at the central bank.
7. The attention on Libra seems to be leading to a view from Congress and the Administration that (a) we must regulate Libra closely, Facebook cannot be trusted and (b) Bitcoin is here to stay.
8. Bitcoin is already the clear global digital currency alternative from a Store of Value perspective and could challenge gold in that regard. Gold has a total market capitalization of $8 trillion of which $2 trillion is held by central banks. Bitcoin is still much smaller at 1/5 of a $Trillion.
9. In the US Bitcoin regulation is mostly in place, with taxation and KYC /AML for exchanges sorted out, a futures market established, and the next big step is retail investment products such as ETFs to ease mass adoption.
10. While volatility of Bitcoin price is high (7% per month) it is decreasing and expected to continue to do so as the market deepens.
11. Bitcoin is an asset, fiat is debt. That alone should drive adoption especially with the next recession and future debt and banking crises. Negative interest rates may be coming to the US, certainly a return to very low rates is on the horizon.
12. Central banks are looking at implementing digital currencies that they would control, but that offers minimal innovation; such a central bank digital currency would still be just the same old fractional reserve fiat, inheriting problems of instability and remaining as a poor long term store of value.
13. Central Banks cannot resist the cryptocurrency /e-money tide. This leaves them three major alternatives: (a) accept corporate money such as Libra, even holding reserves for them, and squeezing banks as a result (b) outlaw or restrain corporate money and build their own digital currency which could mean individuals hold balances at central banks, also squeezing banks, or (c) strengthen their currencies by adding Bitcoin to their balance sheets along with their gold. They could allow banks to issue their own digital money in competition with Libra and other corporate money, and let the market sort it out with appropriate but not heavy-handed regulation and risk supervision.
14. I do not expect the US, Japanese, European, or British central banks to add Bitcoin to their reserves any time soon. But some smaller central bank may very well, and start a Bitcoin reserve race. The central bank of central banks, the BIS, will try to slow them down by saying they cannot include any Bitcoin held as part of their reserve accounting position. But central banks might well hold anyway if they believe it will appreciate relative to gold.
15. The first Central bank to actually add Bitcoin to reserves gets a jump on all the others, and could set off a race. Bulgaria may be de facto the first, since their government has seized Bitcoin used in criminal activities that has a present value of $2 billion. This is about equal to the nation’s gold reserves. If they are smart they will not auction it off.
16. Great macro investors like Ray Dalio and Raoul Pal see a next recession coming and continued overhang of debt pushing the US toward zero and negative interest rates. More debt monetization is on the horizon in their view, and in such low interest rate environments with money printing, pure assets like gold and Bitcoin benefit from a flight to safety. With negative interest rates and even small inflation, cash is trash.
17. Libra is a gateway drug to Bitcoin, and exchanges will make a market. As new people get introduced to crypto through Libra, they will become more aware of Bitcoin and could choose to exchange Libra for Bitcoin as a savings vehicle, while using Libra and competitors for spending purposes.
18. Fiat and Libra and e-money are payment methods, spending vehicles, primarily mediums of exchange. Bitcoin is a savings vehicle, primarily a store of value that can presumably be used for greater purchasing power in fiat or Libra terms in the future due to its stronger monetary policy. Lightning Network and other second layer solutions are enhancing the utility of Bitcoin for purchasing as well.
19. Libra has sharpened the differences in the crypto space. Bitcoin has crossed the chasm because governments in the West are now understanding the clear distinction between corporate money ‘crypto’ and the original decentralized Bitcoin. They have largely worked out their overall approach to Bitcoin regulation while struggling with what to do about Libra and other ‘stablecoins’ or corporate money. Their fear of Bitcoin has lessened as tools to track its usage in money laundering and transnational crime have been developed.
20. After a decade of phenomenal growth, and in time for the 2020s, Bitcoin is coming of age. Expect a growth spurt and many more developments.
“The world that Satoshi Nakamoto, author of the Bitcoin whitepaper envisioned, and others are building, is an unstoppable force” – Patrick McHenry, U.S. Congressman
Libra was announced by Facebook and an Association of companies just a month ago. There has been tremendous interest as well as significant government pushback.
The Libra token and its Calibra wallet will not go live until some time in the year 2020.
The Association is impressive, including Visa, MasterCard, and PayPal along with 25 other companies and non-profits. Facebook’s reach is tremendous, with around 2.5 billion users around the globe. And Visa and MasterCard have relationships with all major banks on the planet.
Is it a shadow bank?
Libra is Corporate money, as distinct from Government money (fiat), or Private money (Bitcoin or gold).
This is not a bank, at least not as yet. President Trump, in a tweet that was probably written by his Treasury Secretary, said they should go get a ‘banking charter’. The French foreign minster is of a mind to deny them any operations in France. In the UK, the Bank of England chair has expressed a willingness to have the BOE hold Association reserves.
In Asia, they have announced that they have no plans to enter India for now, a country which is not friendly toward cryptocurrency at present. China is looking at its own token; Facebook has little presence in the country due to censorship restrictions. Some countries in Southeast Asia have open attitudes; the Thai central bank plans to meet with Facebook soon.
The on-ramps to exchange various national fiat currencies for Libra are uncertain. It seems as if they want to use cryptocurrency exchanges and perhaps purchases through the credit card providers as methods for buying Libra tokens. But these don’t really address the advertised purpose of bring finance to the unbanked.
Although not a bank, the Association can be thought of as a kind of shadow bank, or perhaps a sort of money market fund.
The Libra currency is tied to a basket of leading fiat currencies. While the exact composition of the basket is unknown, it is reasonable to assume that the US Dollar, the Euro, and likely the Japanese Yen and British Pound will be in the basket. Perhaps there will be Swiss Francs as well, since the Association is registered in Switzerland.
Two classes of Libra tokens
Each corporate member of the Association must stake $10 million, and this gives them the right to validate transactions on the network and offer other services to users.
Now it is important to understand that there are actually two types of tokens, the regular Libra token for users, and a special Libra Investment token issued only for members of the Association. The latter is a proof of stake token, the former is a stable coin. This is a key to initial profits generation for the Association.
This whole scheme is somewhat reminiscent of the two classes of shareholdings of Facebook. Mark Zuckerberg controls 60% of the votes by holding class B stock that has 10 times the voting power of Class A shares.
As a stable coin there is no prospect for appreciation. Rather the Libra will lose value in line with the inflation rate of the constituent currencies in the basket.
Dividends will accrue only to the Libra Investment token, and not to the regular Libra token holders.
Now what does this mean in practice? It means the users get fiat-like non-interest bearing depreciating currency, i.e. a ‘stable coin’, and the Association receives all the dividends that, in a more generous model, a sharing model, would accrue in some part to users.
The Association has said they want to grow to 100 members. Let’s imagine that two years from now they have 50 members. That means an aggregate stake for operations of $500 million.
But let’s suppose they also have 500 million users two years from now, which is not a stretch, and that those users maintain an average balance of only $20. One could imagine that it ends up being significantly higher since a percentage of users could end up holding hundreds of dollars’ worth of Libra or more.
But 500 million users at just $20 average is $10 billion worth of ‘float’. This, the Libra Association has said, will be invested in short-term government and (possibly) commercial notes.
In the US yields at 3 and 6 months for government T-bills are just over 2% (2.13% and 2.07% today). In the UK the short term bank rate is 0.75%. There is a challenge for the Association in Europe where most short term rates are negative or near zero. The same is true in Japan.
For simplicity let’s assume current 3-month interbank rates in London for the $, Euro, Pound, and Yen; these rates between banks are currently 2.4%, -0.33%, 0.77% and -0.08% respectively. And for further simplicity let us take a basket that has 50% Dollars, 30% Euro, 10% Pounds and 10% Yen. The overall basket would earn about 1.17%. (It would also require recycling of dollars towards the Euro and Yen to stay balanced).
Now on $10 billion of deposits, 1.17% is $117 million. This is not shabby at all, given the stake of the Association is $500 million. Effectively they are making out like bandits, earning 23.4% on their collective stake. While $117 million divided 50 ways is not very much for the corporate members, in aggregate, this is very good business.
And it provides a platform and income stream that can be used to develop add-on services and applications. There can be little doubt that Visa, Mastercard, and PayPal are interested in value-add service provision to the user base.
That is a gross amount, from this the Association will need to fund operations which include systems and personnel for maintaining all the user accounts, the wallet and other software development, and for the maintenance of relationships with banks and cryptocurrency exchanges. And, not insignificantly, they will need funds allocated to their lobbying efforts with governments to promote favorable regulation in each country in which they operate.
Still, let’s imagine they spend $37 million on operations two years down the road, this still leaves them with $80 million profit on $500 million, a return on equity of 16%. This is a very nice business earning nearly double stock market returns, with a simple business model. And it is all leveraged on the deposits of the users. This assumes full backing of all deposits as Facebook has indicated; there is no fractional reserve assumption here.
This is all money made on the deposits of their users, who place local currency into Libra, and earn nothing. It is the price to them, presumably, of convenience, and perhaps the benefit of an account in a lower inflation currency than their local one.
It could be a lot of trouble for the Association to also pay out interest of only 1% or so on hundreds of millions of accounts with small balances and distribute that. But one can imagine that down the road there would be pressure to pay some interest at least on balances above a minimum amount.
Note also that countries with less strong currencies could find their foreign reserve positions and banking systems threatened if large amounts of local currency are exchanged for Libra. They could well end up restricting usage of Libra, if not banning it outright. And if they care about their citizens, they may demand that Libra share the wealth.
In the first part of this two article series, we noted that Libra is Corporate money, as distinct from Government money (fiat), or Private cryptocurrency money exemplified by Bitcoin. We noted that it is also not a true blockchain in the ledger representation.
Libra will create a basket of fiat, to which it will be tethered, and Facebook’s Calibra subsidiary says the basket will provide 100% backing to Libra tokens.
In this second article we look at likely usage, the Association, government pushback and regulation, and a possible relationship with Bitcoin. We will examine whether Libra can be world money.
Who will use it?
The entrance of major companies into the Libra Association is a significant endorsement of cryptocurrency concepts and will boost the importance of digital money. Government money will carry on, and Corporate money will be a significant part of the market, as will Private Money.
Libra will have appeal to hundreds of millions of potential users for obvious reasons. The first is Facebook’s huge reach and easy and familiar interfaces for What’sApp, Instagram, and Facebook. Now in addition there will be a mobile wallet, Calibra, to hold currency amounts and send to users or businesses within the Facebook world of over 2 billion users via What’sApp or otherwise.
So, scale, ease of use, and a growing set of future applications are big wins.
The other is the appeal of a slowly depreciating (under 2% likely) currency because of the underlying strong fiat currency basket. The users are mainly going to be consumers, because there is no strong investment potential. But for those living in higher inflation nations such as Brazil or India, there could be a preference for holding Libra rather than reals or rupees.
Libra will also be very useful for international transfers by expatriate workers sending money to families in their home countries, presumably for much lower fees than they currently pay.
Libra is going to have to be approved by the financial authorities in each country (more on this in a following section). They are going to have to establish banking relationships and relationships with cryptocurrency exchanges. Someone is going to end up with a pile of rupees or other fiat that wants to be exchanged for a combination of $ € £ ¥.
If adoption is strong this will force down the value of non-$ € £ ¥ fiat and disrupt the foreign exchange markets in weaker currencies. The financial authorities will need to manage this, implying capital controls regarding how much Libra can be purchased per day, etc. And it is the higher inflation, weaker currency nations that already tend to have stronger capital controls. So this is a major hurdle in markets that they see as potentially having the most acceptance.
There could even be a banking crisis in a given country if everyone rushes into Libra with its introduction. We do not expect this, because financial regulators, if not the Association itself, will limit the rate of transfer.
The Association has 28 major players including Facebook, who have created a subsidiary known as Calibra. The participation of members such as Visa, Mastercard, and PayPal indicates they can have a very big reach in payments. This is what PayPal wanted to do, change payments across the globe, and Libra now has a real shot at doing it.
Many other firms will want to join; the Association seeks to have 100 corporate members. Banks will be cautious, and they have other plans in the blockchain arena for their own stablecoins and payment solutions. A voting position and capital position in Libra is a promising investment on its own.
In any case, Visa and Mastercard have relationships with practically every bank worldwide. And they deal in very large volumes of foreign exchange. This provides a path for users, at least the ones with credit cards, to purchase Libra with their particular national fiat, whether pesos, reals, rupees, or rupiahs.
How will the Association make money? They will charge fees for payment services, and develop new applications that operate in the Facebook ecosystem. They will also earn dividends on their special Association-members-only Libra Investment Token holdings since funds will be held in short-term government paper (they have a challenge with the Euro since short-term rates are currently negative in many European nations).
Government pushback, shadow banking?
This brings us to what will be imminent and certain government regulation. Facebook is a highly visible company already under scrutiny for data privacy and other issues. The Libra Association’s mere entrance into the cryptocurrency world, with its heavy-hitter participants, makes it an urgent matter for governments to clearly define their policies and legal framework. Such regulations will impact the whole project, and might even lead some Association members to back out.
Even in the developed world, including countries such as the US and France, there is going to be significant pushback. Facebook is already under the microscope because of breaches of user privacy including with Cambridge Analytica, who illegally interfered in the 2016 American election, using Facebook as a platform.
The Chairman of the US Federal Reserve has made strong comments that Libra must be thoroughly reviewed before being allowed to proceed. The US Financial Services committee chair in the House, Congressperson Waters, said that Facebook should pause their Libra plans until there is government review. There are Senate and House hearings already scheduled for this month on this topic.
Even Donald Trump has weighed in with a series of tweets, saying Facebook needs to apply for a banking charter.
The French Finance Minister Le Maire was even more emphatic. ‘[It must not happen] ça ne doit pas arriver.’
Facebook is already a target for its surveillance capitalism model, and Congress and European governments know who to require testimony from. Mark Zuckerberg, Facebook CEO, and David Marcus, who heads the Libra effort, the Calibra subsidiary, and messaging products at Facebook. He was previously president at PayPal and is currently on the board at Coinbase, the leading US custodial exchange for crypto.
Facebook is in the midst of a legitimacy crisis and has been slow to change. One can interpret the introduction of Libra as a huge pivot for the company and an attempt to change the market narrative while building trust in a very different way. They may have changed the narrative already.
Now you see why they want to call it Libra Blockchain (‘It’s not money, it’s a blockchain!”). The devil will be in the details, with regulatory permission and banking relationships required on a country-by-country basis. The traditional banking community will be lobbying to restrict what many regulators could view as shadow banking.
Libra and Bitcoin. Will they eat the world?
Will Libra aid Bitcoin?
If Libra is a checking account, then Bitcoin has been a savings account, attracting so-called “hodlers” (misspelling of ‘hold’) who acquire, but are often very loath to sell, Bitcoin. At a minimum, Libra is a big boost for the cryptocurrency space. It will promote additional awareness for Bitcoin, and serve as an on-ramp for people who want to not just spend, but also save, cryptocurrency. Existing cryptocurrencies around the world will need to add Libra onto their exchange and people will be able to move between fiat, Libra, and Bitcoin at will, subject to regulatory restrictions. Moving in and out of fiat to Libra will probably require a banking account and a KYC (know-your-customer) process.
And yet Facebook is selling Libra on the idea of reaching the unbanked. How they are going to thread this needle? It looks as if they expect to push the KYC burden onto the cryptocurrency exchanges. The regulation of these has been steadily tightening. It can sometimes be more difficult to open an account on a crypto exchange than it is to open a bank account. And the unbanked don’t have Visa cards to buy Libra with.
Suppose an overseas worker from the Philippines has a bank account in the country where she works. If she sends Libra to her mom back home, who does not have a bank account, how does her mom convert that to pesos? Perhaps her only option is to use private money changers at unfavorable rates or spend the Libra she has received with merchants on the Facebook platforms.
Bitcoin in the basket?
Will Libra add bitcoin? Now a thought experiment. Suppose Facebook and the Association decide to add cryptocurrency to the basket. Since they are positioned competitively against important cryptos such as Ripple and Ethereum for payments, transfers, and smart contracts, there is really only one clear choice: Bitcoin, which possesses over 60% of the market capitalization of all cryptocurrencies combined.
Now Bitcoin is too volatile, you say. Indeed, Libra is designed to be a low-volatility stable coin. But it already possesses some volatility due to the exchange rate fluctuations between the $ , € , £, and ¥.
A small amount of Bitcoin, a 1 or 2% component, would be both a brilliant marketing ploy and a way to strengthen relationships to all the cryptocurrency exchanges. And Bitcoin volatility is decreasing over time as the ecosystem grows and matures and major institutional platforms like Fidelity and Bakkt/ICE come on board.
Once Libra volumes explode, it will put pressure on non $ € £ ¥ central banks to add to their reserves, and even consider Bitcoin as an additional component, a digital gold, within their reserve holdings. The Bank of England governor has made comments that his central bank might be willing to hold reserve balances directly from Libra’s Association, bypassing the commercial banking system.
Libra can’t be a path to world money; nation-states would never allow it. But it could be a viral path for Bitcoin to become a global reserve component for fiat currencies. This would be self-reinforcing for Bitcoin.
Because Libra and Bitcoin are so different, one is for spending, the other for saving, one is Corporate money, the other is Private money, they could end up very complementary, the Yin and Yang of cryptocurrency. And if you are wondering, Bitcoin is Yang, but that is a blog for the future.
This could be some kind of accommodation for all, for Corporate money, for Private money, and for Government money. Happiness for all, for a while, but it would be a metastable period. Corporate money and/or Private money seem to be ascendant. Time will tell, but the Bitcoin ever-tightening monetarily policy is relentless, and this acts as a strange attractor for value.
Daniel Jeffries writes in a recent blog about Libra: “they’ve started the planet down the path of ditching the dollar”. We tend to agree that competing currencies are ready to reduce the importance of the dollar. Libra might play an important role in that process. We also believe that Libra will facilitate the continued rise of Bitcoin.
Our full report on Libra is available for free download at orionx.net/research.
This blog is the first of a two-part series capturing my thoughts on Libra, Facebook’s cryptocurrency announced in mid-June. My thanks to Shahin Khan for his comments and suggestions.
Libra is a clever name. It implies harmony, peace and balance. Librae was also an ancient Roman unit of weight and was used in Middle English to refer to a pound. As we know the English monetary pound started out as a pound of silver. It’s symbol continues to be a special form of the letter L. So there is a deep historical monetary reference.
Libra aims to be the coin that takes cryptocurrency mainstream. Starting in 2020.
Government Money, Private Money, Corporate Money
The idea of a fully digital or electricity-based money goes back several decades. The introduction of Bitcoin in 2008/09 was both a result of technological advancements that provided the foundation for a secure cryptocurrency and a reaction to the failures of the banking system and fiat currency that produced the Great Recession.
Bitcoin fits in the category of Private Money. No government issues it; no corporation is behind it. It is created on ‘mining’ computers in accordance with the Nakamoto consensus and its monetary policy, with a Proof of Work cryptographic algorithm; anyone can mine it. It as if you dug up gold and refined it and fashioned into a bar and stamped the weight and fineness. In this case the Nakamoto consensus inserts the new money into the decentralized open ledger for Bitcoin at the public address of the miner and under the control of the private key of the miner. The miner can sell (transfer to another public address) the Bitcoin for fiat on an exchange and use that fiat to pay the electricity bill and other costs.
Libra, introduced by Facebook and 27 Association partners in mid-June 2019 is, make no mistake, Corporate Money. It is created by an association of corporations in a partnership expected to grow to perhaps 100 members over time. Each member of the association has to stake $10 million to join and must fulfill other requirements related to size and reputation. (Certain non-profits can join under less stringent guidelines).
Is it a blockchain?
These Association members are then able to act as validators of transactions into the open quasi-decentralized ledger of Libra. This is a permissioned ledger maintained by the Association members who take turns serving as the lead validator, each with the larger of 1 vote or 1% of votes.
A key part of the security of Bitcoin is based in chaining of transaction blocks. The chain is created by hashing the previous block and inserting that hash into the current block, and doing this repetitively.
In the Libra model, the block and the chain are virtual. Libra blocks are batches of transactions as proposed by the lead validator. A 2/3 quorum among validators is required to approve the block of transactions. Establishing that quorum relies on a chain, but there is no direct relationship between the ‘block’ and the ‘chain’ for these.
Referring to it as the Libra Blockchain, as the white papers do, is a marketing stretch at best. Each new transaction creates a new ledger state that is stored as a Merkle tree and validated. There are no blocks in the ledger, much less a blockchain. Facebook wants to use the term to help ease the regulatory burden perhaps, and because of general market awareness.
The consensus used by validators is a voting mechanism that requires a 2/3 majority and is a type of Byzantine Fault Tolerance. The consensus can be thought of as a hybrid with Proof of Stake since Association members must put up considerable capital. And in fact, the Libra white paper states the intent is to move to a Proof of Stake algorithm over time. This remains a tricky problem; Ethereum has been delaying a move to Proof of Stake for years.
My Mom was a Libra, she was smart. This Libra also intends to be smart, and to support a range of applications. Libra has its own language, called Move, for smart contracts, including the core token creation, accounting, and payments functions. This is a stack-based language with restricted functionality and with a source level compiler, intermediate representation and a run-time environment in a virtual machine to execute bytecode. Initially the intermediate representation, bytecode specification, and VM are available as open source; the compiler is under development.
Move is designed to be safer than say, Solidity, the default smart contract language for Ethereum, which has suffered a number of hacks. Being better than Solidity is not a high bar.
Less flexibility and not being Turing-complete can prevent ambiguity and are thus desirable attributes for smart contracts moving money around. Initially only a predefined set of essential contracts are available, but the intent is to open things up to the developer community over time.
Move will be the development environment for smart contracts implementing a wide range of e-commerce offerings accessed from the Facebook portfolio. The Libra Association will proceed carefully to maintain security.
Composition of the SDR before the Chinese Yuan was added
But enough of the gory technical details. What is Libra in currency terms and what is it good for? In currency terms it is a basket of strong currencies such as the US dollar ($) and the Euro (€), created with 100% reserve backing in the form of short-term securities (bills) and cash deposited in bank or brokerage accounts. It appears that the initial currencies in the basket will also include the UK £ and the Japanese ¥.
The Libra money supply is dynamic. Libra will be created or destroyed (burned) in response to demand. Thus, unlike Bitcoin, its monetary policy is derived from the mix of currencies in the basket.
So it is a stable coin, but unlike other stable coins, it is tied to a currency basket. It looks rather like the Special Drawing Rights (SDR) administered by the International Monetary Fund, but without the Chinese Yuan. Facebook is not allowed to operate in China for censorship reasons, so the Yuan, which is also subject to strict capital controls, is left out of the basket.
Think of it like a money market fund, but the dividends from holding short-term government paper do not go to holders of Libra. They accrue to a separate currency called the Libra Investment Token that is only held by Association members who have staked the $10 million entry fee.
As Corporate money, it is important that it be audited to ensure full reserves are held as backing, otherwise the value could drop below the nominal currency basket value. It may trade at a slight discount or premium in any case.
There are risks with pegging to a basket of fiat money and accepting fiat money that is not in the basket. For example, suppose a banking liquidity crisis, or a crisis of confidence arises, in Italy (as an example), and fears arise that Italy might withdraw from the Euro. If the Libra Association is holding Euro in Italian banks, seeking higher yields than in Germany, then in this instance they could lose the peg, slip below the nominal value, due to concerns of bank insolvency.
What Could Have Been
The promise of cryptocurrencies includes decentralization, trustless security, immutability, open source access, permission-less participation, autonomous smart contracts, pseudonymity, a tamper-proof monetary policy, and an easy-to-use development environment.
Achieving such a mix of attributes is difficult. When it has been approached, it has resulted in slow transaction rates and volatility, making the currency unsuitable for high volume transactions or for every-day use. To address this, the industry has responded by (a) compromising on the ideals of cryptocurrency, accepting less-rigorous variations of the above attributes in order to achieve higher transaction rates, and (b) creating stablecoins tied to fiat currency to address volatility.
Facebook’s commanding global digital presence can drive adoption and take the cryptocurrency concept to the mainstream. However, Libra compromises on too many attributes of the ideal cryptocurrency to be categorized as anything but a walled-garden Corporate money, and barely a “crypto” currency at that.
Imagine if instead of creating this Corporate money Facebook had:
Created a currency (call it Solar) that association members could mine on supercomputers via Proof of Work, but also any Facebook user could mine on their laptop or phone, and
Established a system that would pay license fees in Solar for data placed into the Facebook platforms, and
Implemented a true blockchain that would secure the ownership of the data for the originators.
The name ‘Solar’ indicates that the currency would be beyond global and eventually be used in colonies on the Moon, Mars and Callisto.
But that wouldn’t be Corporate money, that would be People’s money. That wouldn’t be in furtherance of surveillance capitalism.
Today, June 14, 2019, we released the second biannual list of Top 50 cryptocurrency mining pools.
We do this in conjunction with the Top 500 supercomputing list that is released twice a year, in June and November. That list has been a matter of national pride for the US, Japan, China, and many other countries.
Cryptocurrency mining is a specialized form of supercomputing, producing billions of dollars of economic value per year.
In the Information Age, money has become information. Bitcoin is energy converted to information and encapsulated as secure immutable transactions on a time chain. This is money in the Internet, that we call Money 3.0. Currently it is primarily a store of value, a sort of digital gold, but it continues to grow use cases as a medium of exchange, and unit of account.
Cryptocurrency mining operations are large-scale, run on clusters, but also consist of highly decentralized pools that anyone can join and contribute their equipment to the effort, for proportionate rewards. Most mining is done on custom ASIC computing rigs, highly optimized for the relevant crypto consensus algorithm.
Using statistics readily available on the hashing rates and block production rates for the large mining pools, we can tabulate the economic value produced by these pools.
We consider only mined coins, that is, those that use some type of Proof of Work algorithm such as Bitcoin’s Nakamoto consensus.
We do not consider coins created with other types of consensus mechanisms, since they require no significant supercomputer-class computation. This includes coins produced through premining, Proof of Stake, distributed Byzantine Fault Tolerance and the like since supercomputing resources are not involved.
While there are a number of lists that provide hash rates and block production rates for pools mining a single coin, our lists are the first aggregation of which we are aware.
This raises the question as to how to compare mined coins that have radically different hashing rates and whose consensus algorithms, although often similar to Bitcoin conceptually, differ in the details.
We settled on the economic value of the mined coins that are produced. This enables us to make comparisons across coins when rank ordering the list of mining pools.
We compare the dollar value of a day’s mining from a given pool, with that of other pools, across the top eight mined cryptocurrencies.
The top 10 mined coins have market caps above $0.5 billion dollars, and the #1 coin, Bitcoin, as of our snapshot taken on May 30, 2019, had a market cap of $154 billion.
When we rank order the top 50 mining pools we find that the top eight mined coins in economic value are: Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH), Zcash (ZEC), Bitcoin SV (BSV), Dash (DASH), and Monero (XMR). All of these except Monero are ASIC-friendly, and production is dominated by ASIC miners and clusters. Monero relies on GPUs.
For Bitcoin, Ethereum, and Litecoin we have used 30 day averages as of May 30, 2019 for block production and hash rates; for the other coins 7 day average data was available.
From Table 1 below, which is across all pools, not just the Top 50, we see that total annual economic value run rate (extrapolated from the recent average daily values) is about $8.6 billion. About 2/3 of the economic value created is from Bitcoin production alone, with about $15 million produced per day recently. Ethereum amounts to around one-quarter of that at almost $4 million per day. The next six coins add another $4 million daily. Overall around $24 million per day is currently being mined from all pools.
Table 1: Top 8 Mined Coins (all mining pools, not just Top 50)
New / day
Price 5/30/19 US$
Mined per Day M$
The locations of top mining pools can be multi-country. The next Table summarizes the major host countries for the Top 50 pools; China, the US, and Hong Kong account for 70% of the top 50 pools and almost all of the top 10 operators. China alone is responsible for nearly half of the annual value produced by the Top 50 pools. The Mixed category includes various combinations of US, China, the EU, Russia, or other Asian or European countries. This category has grown as Chinese operators begin to move to other geographies, as a result of pressure from the government to constrain cryptocurrency mining in China.
Table 2. Host Countries, Top 50 Pools
# Top Pools
Table 3: Top 10 Pool Operators (aggregated results)
BTC, ETH, ZEC, BSV, LTC
BTC, LTC, ZEC, BCH, DASH
BTC, ZEC, LTC, BSV
BTC, LTC, BCH
US, EU, Asia
We have aggregated, for the top 10 operators, their results across all of the top eight coins, and summarized in Table 3. Some operators mine two different coins, others mine as many as five of the top eight. These pools account for, when broken out by coin, 30 of the entries in our Top 50 list.
The #1 operator is BTC.com based in China, and it produces $3 million a day of economic value. F2Pool, Antpool, and Poolin each produce over $2 million of cryptocurrency per day. These large operators are responsible for $6 billion of the $8 billion annual production by the top 50 pools. Three of the five largest operators are in China, one is in Hong Kong, and one is in the US.
The winners in this race, for this second list, are Bitcoin, naturally, with BTC.com again as the top pool, and China as the host country for the most top mining pools, including both #1 and #2 positions. Hong Kong has the #3 pool. The US has the second largest number of mining pools.
The economic value of mining has increased substantially. In the first list of November, 2018 we looked at the Top 30 pools, responsible for some $5.5 billion of annual run rate of mining. This new list of Top 50 pools indicates $8.1 billion of annual cryptocurrency creation (even the Top 30 for this list amounts to well over $7 billion).
An article in Barron’s written by Ben Walsh on Valentine’s Day is titled “JPMorgan Just Killed the Bitcoin Dream”.
JPMorgan Chase has announced an altcoin, a stable coin, for use by institutional customers. It will be tethered to the US dollar.
This development is the first such stable coin issued by a US bank. So that is noteworthy. And no doubt it will be useful in expediting transactions for corporate clients. But this is no Valentine’s Day Massacre of cryptocurrencies, no murder of Bitcoin, with its $63 billion market cap.
The major use cases envisioned are (1) securities settlement, (2) international payments processing, and (3) cash management for corporate subsidiaries. It is designed to increase speed and efficiency for these cases, and add flexibility in the cash management case.
Bitcoin does not put faith and trust in JPMorgan, the trust comes from the mining process. In that process, hashing algorithms encapsulate value and security, as transactions in validated blocks. These blocks are widely decentralized and replicated across the Internet.
Bitcoin already allows anyone, retail users as well as corporate clients, to send value across the globe in an hour or less, with fees less than a dollar. The Lightning Network second layer to Bitcoin allows even the tiniest transactions at extremely low cost.
Retail users won’t have access to the JPMcoin. Actually if they want a dollar-tethered stable coin, there are already a slew of alternative coins for that, today. Perhaps in some distant future, JPMorgan would consider entering the retail stablecoin space.
Certainly for some corporate customers there will be a degree of convenience and familiarity with their existing banking relationship. And banking is ultimately all about trust.
In the immediate term, this coin might be a significant competitor to Ripple and its XRP, another centralized altcoin that has found traction in the international banking payments market. XRP is the third most valuable by market cap, after Bitcoin and Ethereum.
Bitcoin will be around at least until 2140, when the new coins issued as mining rewards have stopped, and after that it will be solely supported by transaction fees in what is already a trillion dollar economy, and growing. We cannot be as certain about the longevity of JPM’s new coin.
A privately issued stablecoin is nothing like Bitcoin. Let’s check in on Valentine’s Day 2020.
Suppose Bitcoin could scale. Many altcoins were created in the promise of handling more transactions, and with lower fees.
But Bitcoin can scale, and it will, thanks to the Lightning Network which went live in 2018. While small, it is growing rapidly.
Bitcoin is often criticized for lack of scalability, relative to traditional credit card, debit card, and mobile-based payment solutions. Currently it is capable of about 7 transactions per second onto the blockchain, whereas the Visa network can handle tens of thousands of transactions per second.
The implementation of Segwit, separating signature information, has allowed additional transactions to fit within a single block of the blockchain. Segwit was implemented as a soft fork in 2017 and nearly half of transactions currently use Segwit.
Other proposed solutions have included larger block sizes, but these have required hard forks leading to new coins. The overwhelming majority of hash power and of market cap have remained with original Bitcoin.
Bitcoin is in fact worth more than all 2000 plus altcoins combined.
There are many other approaches to scaling implemented by other cryptocurrencies desiring to address the scaling problem. These include non-ASIC friendly mining algorithms, and a variety of consensus algorithms that eschew mining, such as Proof of Stake, and Byzantine Fault Tolerant protocols more generally.
The second most egregious method is the airdrop, the “helicopter money” of the cryptocurrency world. This tends to be worth, in the long run, close to what you paid for it. The most egregious of all is premining, where insiders reward themselves first, while selling a ‘utility token’ that currently has no utility, and may never have, to others in an ICO.
The problem with these easy money solutions is that they can push up transaction rates greatly, but at an enormous sacrifice in security. You want fast transactions, just lower hash difficulty in mining, or eliminate it. Lower difficulty means lower security. And thus, it sacrifices the store of value aspect of their currency. (Think Venezuela or Zimbabwe).
If you want to conduct large numbers of low value transactions, that may be fine. If you lose your Starbucks card, do you worry about replacing it? Probably not. With a credit card, it’s different entirely.
The solutions described above, such as block sizes and different forms of mining or consensus algorithms, are on-chain solutions. The transactions are all on some “original” chain (which may have been a hard fork from Bitcoin).
An alternative way is to keep the Blockchain very secure, but then add off-chain scaling.
What: Payment Channels
Lightning is such an approach with Bitcoin, building payment channels that can handle many transactions within that channel. At some future date, the consolidated transfer of value for the channel is committed as a blockchain transaction.
Back to our Starbucks card. The card accepts fiat currency of a given amount and then is used as a payment channel until the funds are exhausted over some number of days as a result of your mild coffee addiction. The card, or payment channel, can then be topped up with funds added back into the channel.
Wikipedia has a good definition for the Lightning Network as a second layer payment protocol: “It features a peer-to-peer system for making micropayments of digital cryptocurrency through a network of bidirectional payment channels without delegating custody of funds.”
One opens a channel with another party and each makes a funding transaction on the blockchain to establish the channel. The channel can then be used for a series of ‘micropayments’ (not necessarily small, but smaller than the funding amount in the channel) that are handled within the payment channel.
After a few, or very many transactions, the channel may be closed out by either party and the net aggregate balance transferred is recorded onto the blockchain.
For example if I put in 0.3 Bitcoin initially, and you put in 0.2, the channel was opened with 0.5 Bitcoin total. You and I make a series of Lightning-based transactions, possibly all in one direction. (We’ve been betting on the price of Bitcoin at the end of each month, say).
Let’s also say we agreed to close the channel at the end of the year. And suppose, netted out overall, I sent you 0.2 Bitcoin over a number of transactions. In closing the channel we would commit the final balance in a blockchain transaction showing that you now have 0.4 Bitcoin of the original 0.5, and I now have just 0.1 Bitcoin. That closing transaction gets recorded on-chain.
If we wanted to continue to exchange, we would open and fund a new payment channel.
There is fraud protection; each party can monitor transactions over a chosen time interval. The party in error can lose (to the counterparty) their funding transaction or more.
The Bitcoin blockchain is highly innovative triple entry accounting (you, me, and the blockchain keep records) whereas the Lightning Network uses good old-fashioned double entry accounting (you, me).
How: It’s not just Channels, it’s a Network of Channels
The Lightning Network is more than just a set of disconnected bidirectional payment channels, it is a network of richly connected payment channels. Suppose Lionel wants to send a payment to Linda, but they have no direct channel established.
If they each have a channel established with Lee, they can route the payment through him as an intermediary and he may collect a small fee.
Or they can route through several unknown intermediaries. The network will tend to develop hubs with many connections and larger funding amounts, including commercial enterprises.
As of late December, 2018, the Lightning Network looks like the above image. There are 15,000 channels and almost 500 nodes. The carrying capacity is modest at $2 million presently, but the growth is exponential. The node count grew a factor of 4 in the month of November alone!
Who: Enabling software and Payment processors
Applications built on the Lightning Network are referred to as LAPPs.
There are several payment processors that merchants can use to enable receipt of Bitcoin payments via Lightning. These include BTCPayServer, CoinGate, GloBee, OpenNode, and Strike.
Implementations of Lightning Network Software include Lit from MIT Media Labs, LND and Neutrino from Lightning Labs, and Blockstream’s c-lightning.
The Lightning Network has the ability to go places that Visa, MasterCard, and PayPal cannot reach by enabling micro-transactions across the globe with extremely small fees. It is fraud resistant and has rapid verifiable transfer of the most secure cryptocurrency on the network layer, with eventual settlement onto the blockchain.
As a proof point, a work of art known as Black Swan was recently sold at auction to the < Low > Bidder for only 0.001 Satoshi or 4 millionths of a cent. (A Bitcoin is divisible into 100,000,000 Satoshis).
Another, more typical transaction and proof point was established at an Australian car wash with a transfer of over 1,000,000 Satoshis or about $40 US.
You wanted to buy coffee with Bitcoin? Now you can.
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
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.