BTC Sessions - CAD Crypto Exchanges Dealt Tough Regulations, Stock to Flow vs Efficient Market EP009

Episode Date: January 18, 2020

SHOW TOPICS: Canadian Securities regulators hit exchanges hard https://cointelegraph.com/news/canadian-regulator-issues-new-guidance-for-cryptocurrency-exchanges Summary by Matt Burgoyne https://twitter.com/BurgoyneMatt/status/1217866056519143430 Plan B Stock To Flow Model vs Efficient Market Hypothesis https://medium.com/@100trillionUSD/efficient-market-hypothesis-and-bitcoin-stock-to-flow-model-db17f40e6107 Live Stock to Flow model https://digitalik.net/btc/ Bitcoin up 25% this year already https://cointelegraph.com/news/bitcoin-price-already-up-25-in-2020-after-hitting-9-000 Bitcoin hashrate https://coin.dance/blocks/hashrate/linear SUPPORT THE SHOW: Visit LEDN to check out getting a bitcoin-backed loan https://platform.ledn.io/join/0a00cca3dd61dea5909c95cd41f41685 Get Wasabi wallet and enjoy your privacy https://wasabiwallet.io/ Wasabi Tutorial https://www.youtube.com/watch?v=ECQHAzSckK0 Check out Rise Wallet – the easiest way to onboard your pre-coiner friends to Bitcoin! https://www.risewallet.com/ Rise tutorial https://www.youtube.com/watch?v=X2VUjj6wPM0 Get NORDVPN to protect your online privacy. 75% off a 3 year https://nordvpn.org/btcsessions

Wasabi wallet. I'm fairly private. What's up everyone? Ben with the BTC sessions here and this is your daily session. Before we dive in, of course, shout out to sponsors of the show, leaden.com. This is where you can use your Bitcoin for a variety of different services. They've got their Bitcoin savings account where you can earn interest on your Bitcoin paid in Bitcoin. They've got Bitcoin-backed loans where you use your Bitcoin as collateral. to obtain a Canadian or US dollar loan. So if you're in a pinch, you need dollars,

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they'll actually credit your account with an additional 50 bucks worth of Bitcoin. And secondly, we have Rise Wallet. This is a physical Bitcoin gift card you can pick up at a corner store near you. The way it works, it's much like a prepaid visa card where you pay an activation fee, but then you can gift it to whoever you like or keep it for yourself, really. But I find it is an excellent mechanism for onboarding new users.

Reason being is all they have to do is download the app, scratch and scan a code on the back, and it instantly creates them their own personally held Bitcoin wallet and then sends them an on-chain transaction on the same. spot at the point of redemption for the face value of the card. If you want to check them out, they can be found at risewallet.com, currently only in Canada, but they are looking at expanding, so keep an eye out. And if you click on locations, you can find out where you can pick them up. And with that, let's dive into the news. So this story out of from Coin Telegraph is actually

quite local to myself. I'm from Canada, and this has to do with Canadian regulations surrounding Bitcoin and cryptocurrency exchanges. So they are issuing new guidance for cryptocurrency exchanges. So this is all around should they be treated as securities dealers.

And so what the, I'm going to read a little bit from the article here. It says following an analysis of trading techniques on different platforms, the CSA, which is the Canadian Securities Administration,

concluded that some of them, only provide their users with a contractual right or claim to a crypto asset and do not immediately transfer it to a user. Such crypto trading platforms are subject to securities legislation and thus follow under derivatives laws. The guidance detailed, potentially there will be ongoing reliance and dependence of the user on the platform until the transfer to a user control wallet is made. Until then, the user would not have ownership, possession, and control of the crypto assets without reliance on the platform.

The user would be subject to ongoing exposure to insolvency risk, in quotations, credit risk, fraud risk, performance risk, and proficiency risk on the part of the platform. The CSA will not apply securities laws to crypto exchanges on which the underlying crypto asset is not a security or derivative and crypto assets are delivered to a user immediately. Now, if that sounds like a mouthful, it was summed up pretty well by a friend of mine actually from here in Calgary. And his name is Matt Burgoyne. He runs a law office here. But he said the Canadian securities administrators released additional guidance on securities law and crypto exchanges today.

Basically, provided the underlying crypto asset is not itself a security or derivative. and the exchange's user agreement provides for immediate delivery, and this actually happens, the exchange likely won't be subject to securities laws. Key takeaways, exchanges should have well-drafted user agreements which take all this into account. There should be an actual transfer of coins to a user's wallet as soon as they purchase the crypto, and three, mere book entries don't count as delivery. get the coins off the exchange. So basically, number one, any of the coins or whatever, you know, tokens that you're dealing with have to, first off, not be considered securities. And two, you have to offer instant delivery to your customers. If you are holding custody of those coins for any amount of time that is not, hey, I'm hitting withdrawal or sorry, I'm hitting buy and instantly getting them delivered. or they're instantly sent via the blockchain,

then you could be under the realm of securities law. Now, Nick Carter had something interesting to say on this. He said, it's a strong endorsement of not your keys, not your coins, from the regulators themselves. So he again reiterates that they're not subject to these laws if they immediately deliver the coins. He thinks that this is in direct response to, Quadriga and Einstein, two very public Canadian exchanges, Quadriga at one time being the largest exchange in Canada, having gone over or gone under and lost millions, hundreds of millions of customer funds.

So, yeah, I very much do agree that this would be in response to Quad because Canada has kind of gotten the shit end of the stick when it comes with, comes to exchanges going. under. I will draw attention to, if you're watching this on YouTube, right underneath Bull Bitcoin responding, Bull Bitcoin, unaffected. Why is that? Well, I worked with Bull Bitcoin and they are non-custodial, meaning, yes, you send dollars to them, but at the moment where you actually say, I want to exchange these dollars for Bitcoin, there's no option to leave it with Bull Bitcoin. It is delivered to a privately held wallet. You have to have your own Bitcoin address in order to make the purchase. And the second you hit buy, it gets sent on chain to your Bitcoin wallet.

So, Bull Bitcoin would be, if this is correct, this assertation here, would be not subject to securities regulations. And it's interesting that Bull Bitcoin actually submitted their opinion on the matter earlier, I believe, last year. And they very much outlined this where, hey, if you're dealing with a lot of these coins, they're probably securities. And odds are, if you're holding on to people's coins, it's just inherently unsafe. And it seems that some of those opinions have been taken to heart with this guidance. So we'll see how this develops. Now, I do want to note one interesting thing here. And they're talking about these entities, these exchanges being subject to securities law if they hold users' funds at all.

And that there is counterparty risk involved in all of this. Well, I agree. I think that across the board this is true of any entity holding your money, like banks. And it seems that they're being harsher on cryptocurrency exchanges than banks themselves, because they're saying, like, hey, they don't want any sort of, they don't want any sort of like fractional reserve or anything here, which wonderful. But then you get into fractional reserve banking. you get into re-hypothecation with other securities. And it kind of seems like the regulators here are regulating more than they have with traditional banking.

But I guess we will see how this pans out, but just very interesting to watch this all play out. And it's going to be, it'll be fun to kind of see what happens over the next couple of years in the landscape, especially in Canada, because Canada seems to be very quickly drafting these regulations. now out the gate, they kind of drag their feet initially, and now it's just, it's starting to hit home pretty fast. So moving on, I have been a fan of Plan B's Bitcoin's Stock to Flow model. And what this does is it's a model for pricing Bitcoin based on the issuance of coins in relation to the outstanding on-market coins that are already available and have been mined. Okay. And so this stock to flow model, somebody actually built a live model where you can kind of drag back and

forth and see what the model predicts for the price. And some of the numbers are quite wild, but it has been incredibly accurate, like a 95% accuracy rate. If you take the model, go back to the very beginning of Bitcoin and chart it moving forward, essentially within a certain margin of error, it more or less follows the model to a T. And you don't need to have all of the current information up to now. You can take just the model, go back to the first beginning of Bitcoin and project out basically where we've gone so far. Now, will the model hold up in the long term? We will find out. But just to give you an idea of how wild some of these numbers are, currently the stock to flow model has us in and around the low eight thousands i'm talking

us dollars and currently in in reality we are actually kind of getting close to around nine thousand dollars uh so we are a little bit above but we were recently well below and so it kind of slingshots back and and reverts back to the mean. But with the supply cut, with the halving coming in May of this year, that stock to flow model drastically changes and has a fair market value of right around the time of the halving close to 90,000 US dollars. And that gradually over the next course of the next year or two gets close to $100,000. And you project out further to next having in 2024 and you get into the million plus fair market value kind of realm. Now, these seem astronomical, but so did the idea of $10,000 Bitcoin when it was a penny. So will this

hold up? And one of the major criticisms of the stock to flow model has been something called efficient market hypothesis. And this is something that says, if information is readily available to the public, then it will always be priced in. So that means that if efficient market hypothesis is correct, then the fact that we know the having is going to happen and that we know what stock to flow is and kind of what it projects for price, then it should already be priced in, not just for this happen, but, but the next and the next and the next. And so the fair market value of Bitcoin, even moving forward, is what it kind of currently is. Now, there's a few things to note here.

Now, efficient market hypothesis kind of comes in a variety of flavors. So here are the three examples given here. A weak EMH, efficient market hypothesis. So I'm just going to say EMH from now on. Anyways, a weak EMH says that historical price data is already priced in and cannot be used to make profits. Technical analysis and time series analysis do not work. A semi-strong EMH says public news from media outlets like MSNBC, Bloomberg, Wall Street Journal, and research companies is already priced in and cannot be used to make profits.

Fundamental analysis does not work. And then the strongest EMH would be even inside information, cannot be used to make a profit because all information is already priced in. So the idea is that even if some people, if a select amount of people know something that the vast majority don't, they will still be piling in enough money into the asset that it should already be priced in. So let's take a look at some of the risk and return in relation to Bitcoin and other assets. So this is a simplified risk and return model without any extras in the chart here. So if you're listening, I'll kind of explain what I'm seeing, but if you're watching, then wonderful.

So you have one axis where it has the annual return, and then you have one axis where it has the maximum annual loss. Okay. And on this, there's a nice straight line kind of going up to the right, and one has 10-year bonds, another one has gold, and another one has the S&P 500. And so you have essentially gold having the, sorry, bonds having the lowest risk and the lowest return, gold kind of in the middle, and stocks having the highest. So bonds, the risk would be 8%, and the return would be around 6% annually. Gold has a higher risk of around 33%, but a higher return of 7.5%. Stocks have the highest risk of 40% maximum loss and a high return of annual 8% on average.

Bitcoin does not even come close to charting into this because, well, the annual return is around 200% thus far. So it wouldn't even fit on this chain. onto this chart. So what Plan B had to do is he actually made it so that you would be allocated only 1% in Bitcoin and 99% in cash. So essentially the 99% in cash is just sitting there and stays the same value no matter what and the 1% in Bitcoin would fluctuate. And this allowed him to actually chart it on the model. And it's well above the line of risk and return. Okay. Meaning that it's an incredible deal if it's accurate.

Okay. So what it would have is you would have something of like a only a risk of one percent loss, obviously, because if you're in 99% cash and 1% Bitcoin, then the worst case is Bitcoin goes to zero and you lose 1% of your money. But with a 200% return, but you're only 1% allocated, well, the investment return, on average would be still be over 8%. So better than the stock market with only a 1% allocation and you just sit the rest in cash. So better returns. Again, better annual returns than the stock market with only 1% sitting in Bitcoin, which if you're kind of a risk reward type

person, that's off the charts. It's insane. You literally would have to do nothing. Risking 1% loss is absolutely negligible for potentially better returns than the stock market. So what he then starts to talk about is, well, maybe efficient market hypothesis, maybe we're not accounting for all of the risk. And so he starts to factor in some of the many risk factors. And he says, well, maybe there's the risk that Bitcoin dies or governments make Bitcoin illegal and start prosecuting developers. Maybe there is a risk of fatal software bugs, maybe there's a risk of exchange hacks, maybe there's a risk of a 51% minor attacks, maybe there's a risk of a minor death spiral after the halving where it's not profitable and they just all drop off and the network ceases to work.

Maybe there's a risk of hard forks. And so then he starts to factor in all of these and say, well, okay, maybe we're just not factoring in risk enough and that's the case. Then he starts to look at derivatives markets and seeing what they've factored in for and that, you know, if they project any change with the having from the cut in supply and looking at it, there are literally no spikes, no change indicating nothing special will happen at the halving. So derivatives markets and monthly futures have definitely not priced in anything in relation to the having. And so what he also did is he did a poll on Twitter, which again is by no means excellent data. But he said, what do you think? Why do you think Bitcoin price will go down?

And one of the top rated answers was futures slash manipulation. So they see Bitcoin futures at the biggest risk, which would be whales and governments manipulating the Bitcoin price with paper Bitcoin spoofing and wash trades. So essentially what he gets at here is he thinks that efficient market hypothesis is is kind of true, but that the people that are trying to factor in the risk are vastly overestimating the risks of the aforementioned things. So things like, well, if Bitcoin dies, again, the longer Bitcoin is around, the less likely that is, is to happen. Same with fatal software bugs. Now, risk of exchange hacks, I mean, those have happened

all over the place. And they used to have a big impact on the price, but now, more often than not, they don't. When Einstein exchange happened, there was barely a blip on the radar. Back in the day, when you looked at Mount Gogs, that cratered the price of Bitcoin for an extended period of time. So very different. Risk of 51% attacks. Well, mining is getting more and more decentralized, so that's probably not very likely. Minor death spiral, well, that's a friggin thing that comes up every time there's going to be a having, and it does not happen, at least in terms of Bitcoin anyways. Risk of hard forks, we've already had hard forks, and they just kind of diddle off into obscurity and become a fraction of the cost of a Bitcoin. So he, and as far as making Bitcoin,

illegal, I would lean towards that not even being a close possibility anymore because it's becoming entrenched in financial systems and you're starting to see just regulations to fit this and shoehorn this into traditional markets so that you can get institutional investors and you can get even retail investors doing stuff like getting exposure to Bitcoin in their mutual funds. So I very much doubt that's possibility. So what happens is over time, as those things don't come to fruition and become impossible or very, very unlikely, all of a sudden, all of that risk is no longer factored into the price at which point you could be seeing price points later priced in after the fact and potentially

bringing us to those kinds of numbers that the stock to flow model predicts. So again, the fair market value of Bitcoin tends to not hit until well after the halving, at least historically in the past couple havings. It hasn't happened right away. It takes a while to, it's a lagging indicator. So I guess we will see what happens, but I do anticipate that the having is hella not priced in if I have to say so. So anyways, I guess we'll finish up with just a couple things.

At the time we're recording this, we are sitting, we've been bouncing off, we tapped 9,000 last night, we got up there just a little bit above and then bounce back down. It's really having some trouble getting past this 8,900 level decisively, but once it kind of busts through that, then we could be seeing levels and kind of like, then I think the next resistance is around. the 93-9,400, and then just before 10,000, there's some major resistance there. So we shall see what happens with that. Worth noting that Bitcoin is already up 25% this year alone. This, despite, hold on, and I'm going to step away from the mic here because I got to grab something for the video. I did get this beautiful, and if you're listening on podcast, you can't see this, but I did

get this beautiful tweet framed, uh, from framed tweets.com, I believe. Anyways, it's Peter Schiff. And he tweeted on January 6th, uh, for those Bitcoin bugs excited about Bitcoin's 4% rally in 2020. Think about this. Gold is also up by about the same percentage this year, only with significantly less downside risk. Is this the best rally Bitcoin can muster? How will it ever hit 50k, let alone one million. I find this hilarious. I'm super excited. I got this framed. It is so funny. Again, up 25% on the year. It's January 17th. So 11 days after he tweeted this and it's already aged so poorly. I like that I got this framed in gold as well because it's only fitting from Peter Schiff. But again, and he's talking about significantly less downside risk. We just talked about this

with the whole stock to flow and efficient market hypothesis, with a 1% allocation of Bitcoin, you have better upside and less downside risk than holding gold. So it's pretty unbelievable. But anyways, not only is Bitcoin price up, but the Bitcoin hash rate, the measure of Bitcoin competing power, securing the network is hitting new all-time highs all the time. So recently we hit a level of around 149 X-A-Hash. So 149 quintillion hashes per second. If you don't know what that means, it is a fuck ton of computing power. And just to kind of reiterate how powerful that is,

this website called CoinDance actually takes Bitcoin and forks of Bitcoin, or at least ones that are somewhat big enough to track. And it tracks things like their hash rates. And so here on the chart that I'm looking at, you see just massive hash rate from Bitcoin. You may not even notice if you're actually watching this, but there's a couple little squiggly lines down just like hugging the very bottom of the chart. That is both Bitcoin Cash and Bitcoin SV,

and they barely even register on this chart. And remember that if you gain 15, of a network hash rate, then you could potentially be able to screw around with the ledger and reverse transactions. If even like a tiny bit of the Bitcoin hash rate split off even temporarily to attack either of those chains, they could cause a world of hurt. And the only reason I don't think it's happening is because the miners want Bitcoin too badly and they don't give a flying fuck about cash or SV to even bother screwing with the network. Why would you?

You're losing Bitcoin while tinkering around with a completely inconsequential chain. So yeah. Anyways, guys, I'm going to wrap it up there. Thank you so very much for watching and or listening. Always for sure hit like, subscribe, and share. And if you're listening via podcast, share that on your social media. If you want to help the show in another way, you can hit up the sponsors down below, leaden and rise wallet, as well as Wasabi wallet. Check that out for privacy on your Bitcoin transactions.

And finally, you can always check out in the privacy vein, NordVPN. I use this regularly on my computer and my phone. It hides your IP address, encrypts your browsing data, and has the added benefit of unlocking geoblock content. So if you can't access certain content, you can just change where you're from. And boom, instantly available. If you want to check that out, there's a link down below, or you can head to NordVPN.com. use the code BTC Sessions, all one word, and you'll get a deal where it's only three bucks and 49 cents a month, which is pretty damn good, if I do say so myself. With that, I am out. Have a wonderful evening, and I will see you after the weekend for your daily session.