On The Brink with Castle Island - Weekly Roundup 04/23/21 (Estimating hashrate, mining Bitcoin with solar, capital gains hike?) (EP.209)

Episode Date: April 23, 2021

Matt and Nic return for news and deals of the week. In this episode:  43% capital gains taxes? Are decentralized storage networks reaching fruition Binance US hires ex-Comptroller Brian Brooks Matt's Turkey problem A Turkish exchange apparently exit scams Scott Minerd has a new target for Bitcoin Bernstein isn't worried about Bitcoin's energy consumption Ark Invest thinks Bitcoin is an incentive for renewables How much did Bitcoin hashrate really collapse? What did we learn from the Xinjiang shutdown? Why hashrate is hard to estimate Xinjiang is more renewable than you think Content mentioned in this episode:  Alliance Bernstein, Is Bitcoin ESG Friendly for Equity Investors? Square and Ark Invest, Bitcoin is Key to an Abundant, Clean Energy Future [pdf] This episode supported by:  Sovryn, DeFi on Bitcoin Eventus, global leader in trade surveillance, market risk and transaction monitoring solutions

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All right. So what a week. I think the whole market is just puking off right now. Equities, crypto, everything. Everyone's afraid of capital gains. Yeah, it turns out when you mess with an incredibly longstanding tax policy, people start to get nervous, especially when you hike taxes to a rate. that's completely out of step with every other developed nation.

There's a lot of rumors, and hopefully there are rumors, around some special crypto punitive regime or something like that. Those better just be rumors. Yeah, I mean, I see absolutely no reason to put any credence in those. Just tweeting stuff in all caps doesn't make it true, as we learned this week. It's very true. Well, we had a busy week on the podcast. Well, actually, we only had one podcast this week,

So it was kind of a slow week, I guess, for the podcast. But we had Nick Newman, who's the CEO of CASA, to talk about Bitcoin custody, how they're making it easier for individuals to safely store their Bitcoin using multisigs. Always great to chat with Nick. I didn't realize we'd never had him on. Yeah, it's kind of crazy, 200 episodes. And we haven't had Nick on the show.

I got into details. I use CASA. I'm a CASA user trying to broadcast that. So nobody kidnaps me because I cannot send a Bitcoin transaction without great inconvenience. Thank you to Casa. So, you know, would be criminals. There's better targets out there. Check out.

Yeah, those people that are not doing multi-sig, the single-sig people. Yeah. Go for them, please. Well, pretty busy deal. week. A bunch of stuff happening this week. First one up is Aleo. This is a platform for programmable data privacy. They raised $28 million from Andresen Horowitz, placeholder, Galaxy variant, and Coinbase ventures. Next up, we have the block, beloved Crypta News organization. You're all familiar with it, I'm sure. They bought out existing shareholders. A management buyout. Yeah. So I

believe the objective was to gain genuine independence and cleanse their cap table of other potential influences. So pretty interesting and gutsy move from the block. That is pretty cool. I mean, you don't expect to see that in like venture backed companies this early in their life stage. But yeah, really gutsy move. Next one up is file based. This is a decentralized storage company. there is $2 million from multi-coin capital version one ventures and Ryan Selkis. So FileBase is building on top of the SIEA network, if I'm not mistaken. So we are seeing some of these decentralized storage projects come to fruition. I looked recently in Filecoin is providing something like $30 million a day in security spend to miners.

I don't know if that's what you call them. for file coin. It's a tremendous amount of money. Yeah, it's preposterous. I'll double check that. I don't want to be spreading fake news out here, but it's a lot. Next up, we have Alto IRA. They are, as the name suggests, a company that enables crypto IRA holdings.

They raised a $17 million series A led by unusual ventures with participation from Accrue, Alpha Edison, Carter, Franklin Templeton, New York Life, and Stone Ridge. The next one up is Digital Asset Holdings. This is the Enterprise blockchain company that was originally founded by Blythe Masters. They raised $120 million in Series D funding from Seven Ridge and Eldridge. And if you were down on private blockchains, they're back. In case you're counting, that's three ridges in the last two deals. Oh, you had Stone Ridge?

you had seven ridge and you had eldridge that's pretty good there's a lesson in there so speaking of nydig first foundation announced a strategic investment in nydig so they're on both sides of the cap table this week first foundation has their hands in all sorts of integrations with banks and so i think this is actually a pretty notable development and maybe you start to see more um you know ability to buy crypto assets on bank platforms as a result of this maybe just conjecture but seems pretty significant to me conjecture is the name of the game in this industry i'm just going to throw that out there and see if it lands i think nydeg is uh is up to something with first foundation here i mean look we've broken news on this podcast before infamously microstratogy news was basically

not broken but i believe you were the first one to point out the uh remember simpler time summer 2020. Yeah, just who's this guy Michael Saylor's before he became an absolute savage? Yeah, I mean, you saw the disclosure and because for those who aren't aware, Matt is all over SEC filings and stuff. It's like one of his skills. And they called out Bitcoin in their quarterly note, I believe. And it wasn't clear if it was going to be a big deal or like a tiny part the treasury and then, you know, we all know what happened. He just took out $2 billion and bought Bitcoin with it.

I watched a debate with Michael Siler against like a gold enthusiast. How do you do? And he just destroyed him. It was unbelievable. Yeah, once you get him going, it's hard to stop him. There's this great passage where Michael was. comparing, he was talking about all these instances where gold was seized in warfare. And he was connecting gold to all these military campaigns.

It was very stirring, very compelling. He's good for that. Well, Nideg again, so they've acquired Arctose Capital, a company that provides financing solutions to Bitcoin miners and crypto firms. So maybe a bit of a mining emphasis over there these days. Mining, hot topic right now. Next one up is Coin Switch, Cuber. This is the India-based cryptocurrency exchange. They raised a $25 million Series B from Tiger Global.

India cryptocurrency exchanges have kind of been hot, not hot, hot again. It's all due to the regulatory environment over there. It's just shifting so quickly. Yeah, that's an interesting bet for sure. We'll see what happens in India. I thought the latest news we had was that the regulatory trade wins had turned against crypto. But maybe even despite that exchanges are interesting bets. Speaking of exchanges, moving on to news,

Binance U.S. has hired Brian Brooks, also known as the most popular Comptroller, probably ever. I mean, I don't think people knew what the office of the Comptroller. of the currency was before Brian Brooks came along. He had an incredibly impactful tenure. Subsequently left as the administration changed, and now he's running Binance U.S. This is pretty fascinating.

So, you know, I guess the first thing to think about here is Binance, the kind of parent company or the original. Actually, it remains unclear to me how these guys are affiliated because it says it's like fully separate, but Binance is on the cap table. I wonder how that's actually set up. But obviously, Binance is the largest cryptocurrency exchange in the world, but they're unregulated. And so now you have a former acting head of the OCC coming in and running a subsidiary or sister organization that is regulated as an MSB in the United States.

I just wonder what that is going to look like with Binance, the unregulated venue. I must say Binance has been spending more heavily on. regulatory goodwill, shall we call it? Yeah, they had some of their peers. Some former senator joined their advisory board or something. Yeah, we talked about that in a prior app. So they're investing in regulatory rapprochement, which seems wise to me. Yeah.

I think things are about to take a turn from a regulatory perspective and not for the better. Yeah, and not in a good way, you think? No. Well, I don't know. So speak a little bit more about that. You have some people that are very bullish on Hester Persis, safe harbor, at least from the SEC perspective, but maybe you're suggesting that some of these offshore unregulated venues might be in the crosshairs of other regulators. Yeah, I mean, even if the safe harbor thing gets pushed through, I don't think it's a panacea for a bunch of tokens. Because, I mean, if you look at what, as we said last week, if you look at what Hester is asking for, it's,

disclosure, fairness, closing those information asymmetries. A lot of those things are toxic to the way that tokens operate, which involves information asymmetries, not doing disclosure. So I don't think that, you know, solves things for a lot of tokens. Beyond that, I mean, this administration with a proposed 43% capital gains tax, one of the objectives, clearly, is reducing inequality and leveling out the balance between labor and capital. Capital has won the battle for the last 40 years. Clearly, things are primed to switch, and crypto represents the most unrestricted, unrestricted

capitalism out there. What better target than to go after the crypto industry? especially the rampant token issuance. So yeah, I tend to think that it's going to be a challenge in a couple of years here, especially for the token issuance side of the industry. Yeah. Well, we will see. The Wall Street Journal had a pretty extensive profile on Sam Bankman-Fried, the founder of FTX,

which of course is one of the largest cryptocurrency exchanges in the world. They're unregulated as well. So I don't know. That's a big spotlight there. Yeah. More regulatory news, Christian Carlo, aka Cryptodad, former chairman of the CFTC, has joined the BlockFi board of directors, which is a great acquisition for them. Congrats to BlockFi.

Yeah, that's a strong move. In other news, Venmo, which is now owned by PayPal, they announced that they will add buy and sell support for crypto assets within their app. So talk about distribution. Yeah, this is one thing that I think people kind of miss is just Venmo and PayPal becoming effectively L2s for Bitcoin and other assets. And when people say, you know, no businesses except Bitcoin, it's just not true anymore. I mean, whether it's Visa or PayPal or Venmo, you could make payments with crypto.

currency now. It's just that they are intermediated by these third party applications and that doesn't defeat the purpose of it in my opinion. It just means you get a really clean simple U.S. Of course this stuff doesn't scale the base layer

nor should you be using bearer assets for every retail transaction. So, very positive and I think overlooked is this move by these fintechs to just embrace the industry. Yeah. Yeah. Absolutely. While speaking about embracing cryptocurrency payments,

WeWork has announced that they will accept cryptocurrencies as a form of payment for WeWork cubes. So this is a secret, but we actually use a newsletter that Matt pretty much exclusively writes as guidance for this podcast. I know it would be, I'd love to tell you all that we just ad lib the entire podcast, but we do have some content that we rely on. And in this entry, Matt wrote, given the state of the business, they would probably also accept scrap metal and collective stamps.

And my bike, by the way. Bike. So speaking of the, of the bike saga, which was kind of an ongoing thing, I've got another problem in my life. Okay. Tell us about your problem. So I moved into this new house at undisclosed location a couple days ago.

And so I'm no longer in the city. And we went to the home inspection, you know, a month or two ago when we bought the house. And I noticed that there was a turkey in the backyard. And I thought, oh, that's like pretty, that's cute. Like we have a turkey, like walking through our backyard. And didn't think much of it. fast forward to the day we move into the house, 19 turkeys in my backyard,

walking through, just strolling through my backyard, just through the back, just digging up all the grass, just defecating in the backyard, walking around the house into the front yard, and then I come to find out that the next door neighbor feeds these things. These things are being fed by the next door neighbor.

they're so the only way I can describe this is it's an infestation of turkeys at my new house how large are these turkeys I mean some of these things are like they look like they're about 50 pounds like they're bigger than a dog and they're I need to get to the bottom of this because you know these things are these things are like rabid animals I mean, did they pose a threat to you? I think it depends on the size of, like, I mean, 19 of them. I'd like to think I could take like 10 of them pretty easily. Maybe I could take 19 of them.

I can tell you that if you had like a dog, the dog would be in like a world of pain. Did you count, you counted them individually? I had 19 turkeys on my backyard. How can you even accommodate? that many turkeys in a relatively small plot of land i mean these guys were there were the best i can describe it is a military march from one yard to another towards towards the food have they taken up oh like have they taken up residence in your backyard well yeah and that's the other thing so apparently turkeys fly which you know i i you'd look at them and you'd say like maybe they could fly a

little bit, but they can actually get into trees. And they're, so they, they roost, I guess is how I would describe it in trees. They sleep in the trees. Well, I mean, they're birds. So that doesn't really surprise me that much. So I'm going to need some advice from the listeners on the best way to prevent turkeys from infesting your house. It's like having a, like, rats.

So, hang on. So are they protected? Are they locally protected by law or something? Well, this is where I don't know, and I don't know if I want to know, because we'll see how this situation evolves. I want to have plausible deniability on what I knew and when. So you don't want to go on your podcast and front of thousands of people and lay out what you're going to do to these things? I don't know anything about anything about anything. But yeah, we got some very dangerous turkeys is all I can say.

So if suddenly there's 19 fewer turkeys in Massachusetts, that's just a coincidence. Well, or maybe the neighbor stopped feeding them. So get on the castle, the on the brink sphinx chat. Because we have a tribe on there. We got a good group on there. Give us some suggestions. Give us some local expertise. on how to deal with turkeys.

Yeah. Including their protected status, if applicable. I mean, this is the, I've been living in South Boston for quite a while, and I'll tell you what. Actually, there was a turkey at one point in South Boston, but it was just a one-off turkey. So this is a whole new ballgame to me. I ran into three menacing-looking turkeys on Thanksgiving last year in South Boston,

and I thought to myself, like, I could just eat those turkeys. if I wanted. They look a little mangy, though. Yeah, they weren't looking really all that edible, actually. But the thought did cross my mind. I don't know how we got on this topic. I think it was WeWork, which is a phrase that just really works me out every time.

But yeah, now I got turkeys. I look forward to next week's development. My intuition here is that things are going to get wilder and, you know, could culminate in some chaos, dare I say. Things will happen. Things will definitely happen. We're not at a stable equilibrium. I'll tell you that. The center cannot hold.

Yeah. Things will happen. So here's something. CoinDusk is reporting that Gallic. is looking to acquire Bitco, the crypto custodian. Yeah. So if this is true, I think it's a really good move by Galaxy, really diversifying some of their offerings,

getting into custody. Custody can, of course, be the basis on which a lot of businesses are built, you know, the trading, prime brokerage, all sorts of things. So really, we'll see what happens there, huh? So the Morgan Stanley Bitcoin Fund, we talked about last time offered in partnership with FS investments in Nighting, they've raised 29.4 million in two weeks. Pretty good.

Yeah, I don't know where that stands relative to my expectations. I guess I didn't really have any. On the crypto exchange front, you know, I saw some research last week saying that exchange hacks had really declined over the last couple of years. which, you know, it's sort of unsurprising that now there's potentially an exit scam or hack. It's not clear, but there's a Turkish exchange called Thodex. They have apparently ceased operations, and the CEO has reportedly fled to Albania. And hundreds of millions of dollars are unaccounted for, apparently.

That doesn't sound like that's going to end well. doesn't sound good and you know it's just on the cusp of the revitalization of the concept of proof of reserves which is is going to happen imminently so stay tuned for that

there are some big developments big announcements big announcements to happen on the proof reserve front though decks man that's going to be like quadriga it is apparently a lot of money it's not 100% clear how much, but it's extremely volatile situation in Turkey with the potential outlawing of the

usage of crypto in payments, although not outlawing ownership. Of course, they fired their central bank governor, I believe, very high inflation, extremely volatile situation there. Did you see this Guggenheim partner, CIO, Scott Minner? who, you know, he's been out there predicting 400, 600K price targets on Bitcoin before. He's now saying we're going to have a 50% decline. This guy is like every month or so. It's a different thing with him. I think he's trying to tuck down the market a little bit again.

Yeah, I don't really understand how you can set a price target that's many multiples above our current price target and then say that you also expect a ton of downside. I mean, it seems like regardless. what happens. Yeah. Yeah. What is, you're forecasting every possible outcome at that point?

I mean, I guess, you know, it's like if you had to just timestamp a bunch of predictions, and then something's going to happen, and you go back and you're like, hey, that's what I said.

Well, that's why this time stamping and reveal system doesn't work, because you have to prove that you've, do you have to prove the exclusivity of a prediction? Yeah. So you can't just make, you know, dozens of different predictions and then only reveal the one that was right. Well, according to Scott Minard, we're going to 400 to 600K, but we're going to take a little detour down to 25K. So elsewhere in money management, Alliance Bernstein had a good blog post entitled, Is Bitcoin ESG Friendly for Equity Investors?

I thought this was great. And people forget that G and ESG stands for governance. They always forget that part. And Bitcoin proposes a system of monetary governance, dare I say, that is far superior to existing systems. So I don't think it's a stretch to say that Bitcoin is pretty ESG friendly. Yeah. So they said concerns about the high energy intensity of Bitcoin mining are overstated, and this technology can play a less acknowledged but important role in promoting financial inclusion.

So it sounds like Alliance Bernstein's coming around to Bitcoin. I mean, have they been reading some of my blog posts? I'm not just going to come out here on my podcast and claim that they read some of my coin desk op-eds or blog posts, but some of the language is a little reminiscent. of that, dare I say. Oh, is that a plagiarism? Did you just accuse them of plagiarism? No, no, no.

No, I'm totally not concerned about plagiarism or paraphrasing or anything like that. I liked how they gave a shout out to Square and Arc. Obviously, Arc published this really interesting piece of research yesterday on how Bitcoin could eventually be an inducement to build renewable, powered sources of energy because Bitcoin absorbs excess energy. If you combine it with batteries, you could potentially get a system that's renewable, that's not intermittent, and repays itself, and is sort of worthy of investment.

and so they released some really interesting modeling on this front. The Financial Times, Alfaville, really didn't like it. No surprise. Alphabill, well-known antagonist of Bitcoin. But I thought it was pretty thought provoking, for sure. Yeah. What did you make of the Bitcoin mining developments in China over the weekend? Well, as always,

Most people... By the way, there's a turkey right out my window right now. See, they knew and they're sending you a warning. I'm going to take a picture of this. Okay, maybe we can replace our normal picture of... Maybe that can go in the show notes or something. Maybe. So we know you're not fibbing about the turkeys.

I'm going to send this to you right now. You look visibly shaken by this avian invader. I mean, this guy is staring at me. That's quite a, I mean, that's a considerable beast. That thing is large. It's just sitting there taunting me. It is, it's staring you with its beady little eyes. This is what I'm dealing with right now.

All right, so Bitcoin hash rate. So I think people either don't understand, statistics or they just don't want to understand statistics. It's one of those two. It's probably they don't want to understand it because it's not like the most scintillating discipline. But anyway, people overinterpret 24-hour changes in hash rate or rather implied hash rate. And what this is exactly what happened recently about a week ago there were a couple days where there were relatively few blocks 100 blocks 92 blocks and the implied hash rate you know fell dramatically but you just really shouldn't be looking at hash rate on that narrow of a window because you're getting so

few data points that you're not going to be able to get a reliable estimate so that's exactly what happened. Granted, it appears, and we verified this with sources on the ground, that the mining activity in Xinjiang province and China was temporarily shut off after this coal mine flooded and the authorities went in to basically inspect all of the mines. So we know that was true. We do know that the Bitcoin hash rate declined a bit, but the decline looks more like 20 to 25 not 50% as some people were reported. So you just can't look at these narrow windows in order to ascertain changes and hash rate. There's so much variance in the implied hash rate.

So I was very frustrated with that this week. Well, I guess it's kind of a good development in the sunset. It's just a good chance to look at some data and make some inferences around. who controls hash rate and things like that. Absolutely. And I mean, I spent, I've spent so much time in the last year learning about how the Chinese energy grid works, which I don't know why, how I ended up doing that.

But basically, Zing Zhang is actually quite renewable. People don't know this. The latest reports are that Zing Jiang is about 50% wind and solar, believe it or not. And so if you look at the wind and solar and hydro penetration of the U.S. grid, the equivalent is only about 20%. So, you know, people talk about Zingang being coal-powered and certainly coal has a higher carbon intensity than any other source of generation. But, yeah, Zing-jang is also pretty renewable.

People miss that. But yeah, my takeaway from this is that actually the Chinese influence over Bitcoin is less than we thought. The data that everyone looks at is the Cambridge Center for Alternative Finance data, but that data is one year old. It is a full year out of date now. So you cannot rely on year old data to make a good estimate. It is being refreshed. That data is being refreshed, but it's not current right now. Well, always good to have some fresh data coming out of there.

It'll be interesting. I don't think the price movement over the weekend had much to do with that. But certainly some people thought there might have been some interconnectivity there. Well, I mean, I do think people sold off because they saw reports the Bitcoin hash rate collapsed. In the press, it was reported as an outage of the Bitcoin network, which is false. The Bitcoin network did not have an outage. Technically, the way it works is the Bitcoin network is always out. unless it's ticking one block into the future.

So, you know, the Bitcoin network is static and it advances on a per tick basis every 10 minutes. It's just so happens that the blocks were a little slower than usual. But it wasn't a catastrophe. It's just that the fees were slightly higher. So there was no network outage. All right. Well, I think that's it for the week. We're going to have an episode on the Metaverse on Monday.

All right, looking forward to finding out what the Metaverse is. It's that place where you sit in your Ready Player One chair and you just zone out. You know, I've never read that book. Oh, really? Why not? It just seemed very cringe to me, so... It's not. It's a good book. I can't do it. But yeah, that's it for the week. We'll see you on Monday.