The Breakdown - 9 Reasons Why Bitcoin Has Never Been Stronger Going Into A Halving

Episode Date: May 8, 2020

The bitcoin halving is just a few days away and the growing excitement is palpable. On this episode of The Breakdown, NLW argues that the excitement is also legitimate, and looks at nine reasons why bitcoin has never been stronger going into one of its every-four-year issuance reductions: Price Hash rate Mining competition Accessibility and Services  Infrastructure Institutional awareness and participation Narrative relevance Perceived and real resilience  Lindy effects  Oh, and let’s not forget. Paul Tudor Jones just disclosed that he is invested in bitcoin and sees it as a hedge against ‘great monetary inflation’

Check up Bitcoin surging more than 15% this week, our very own crypto baller, says another big breakout could be coming. So, BK, how many days is it till they halving? It's about 11 days to the halve it. And so what that means, what people should know is that, as the whole world is quantitative easing, Bitcoin's about to be quantitative hardening. So they're going to cut the daily supply. The software is going to cut the daily supply. It doesn't mean that the price of Bitcoin is being cut in half. It just means that the daily supply is being cut in half.

You might want to think about it like oil, where all of a sudden, in 11 days, half the oil rigs are turned off. And so, therefore, that supply gets reduced. In the past, this has been a catalyst for very, very, very big runups. We've had a tremendous runup coming into this. It's got some wood to chop around 9,000. But I think in the medium to long term, you now have an asset that is going to be more scarce than gold based on the stock-to-flow ratio in an environment where the entire world is Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by ArisX.com, the Stellar Development Foundation, and

Grayscale Digital Large Cap Fund. The Breakdown is produced and distributed by CoinDesk. Here's your host, NLW. Welcome back to The Breakdown. It is Thursday, May 7th, and for those of you keeping track on that clip from CNBC's Fast Money with Brian Kelly. You just heard one, quantitative hardening in the face of quantitative tightening. Two, make sense comparison between Bitcoin mining and oil rigs as it relates to the halving. And three, an argument that Bitcoin will be more scarce than gold based on the stock-to-flow ratio.

Ladies and gentlemen, today we are talking Bitcoin bullishness on the way to the halving. Nine reasons, maybe 10, I can't even keep track anymore. why Bitcoin has never been stronger going into the halving. There has been a distinct shift in tone around Bitcoin, Twitter, and crypto Twitter over the last two weeks away from just the incessant look at coronavirus, economic outcomes, to really getting excited about this particular moment, and I think symbolically what it means. So this episode is all about nine reasons why Bitcoin has never been stronger going into a halving.

First, let's talk price. Oh, it's so crass. it's not the big thing, it's about the long term, sure. But price matters. Around the time of recording, the price of Bitcoin was at 9,500. It is surging. And of course, this number is higher than previous halvings, but what's important is why the number matters. Number go up is what attracts a huge portion of new people that come into the Bitcoin space. It attracts them to come join the network, which increases demand and increases security in a virtuous cycle. But what's more, even for those who care about converting Bitcoin,

into really believing in a similar set of outlooks on the economy and on society as a whole, there has to be some door that they walk through. And for a vast majority of people, or for at least a significant number of people, that door has to do with a growing price. The fact is, this is not just a price that's static. It's a price that's going up in the lead-in. This price rally seems to be coinciding with the upcoming halving. That matters even more when it comes to that symbolism of attracting new attention. You're seeing it all over Bitcoin, Twitter, people sharing text messages and DMs from their friends of people who are getting that FOMO feeling as they watch the price grow. There's another reason, though, that the price matters as well. It matters for

mining. On CoinDesk on Thursday, April 30th, they reported that even older machines that we assumed would be obsolete are starting to be able to, again, make money at these prices. So according to the minor profitability index, which is tracked by mining pools, including Pool Inn and F2 pool, older mining rigs like Bitman's Antminer S9 or Canon's Avalon 851 can now generate at these prices a 10 to 20% gross margin at an average electricity cost. That's huge, right? More miners being able to participate and make money means higher security in the network, which gets us to our second reason why Bitcoin has never been stronger going into a halving.

Mining is surging in advance of this event. On Sunday, May 3rd, Glassnote reported that the hash rate, aka the processing power of the Bitcoin network, was hitting all-time highs. So that hash rate, which is such an important part of the Bitcoin ecosystem, is at all-time highs as miners start to crowd in. On Friday, May 1st, there was also this interesting little anomaly where, usually miners mine six blocks per hour, 10 minutes per block. In a one-hour period, a 63-minute period, that miners mined 16 blocks on Fridays.

So the point here is that there's a huge increase in hash rate. It's surging advance of the halving. Some critiques have said that that hash rate craters in the wake of the halving, right? Because there's certain machines that just aren't profitable anymore. They're not going to be able to compete with such a reduced output, right? A 50% reduction in the block reward means that some amount of miners are going to lose out. Well, the thing that's interesting about this argument is that as much as we debate whether the halving is priced in when it comes to the actual kind of asset price of Bitcoin, I think it's a much stronger argument that when it comes to businesses that are designing for the future, to believe that they have designed their system or to understand

how the having is going to impact their business. In other words, the halving is much more priced in when it comes to minor profitability and what mining businesses can expect than it is in terms of just the random consumer asset price at any given time. So I don't believe that we're going to see a 50% reduction in the hash rate overnight. I think that you're going to see inefficient miners cut out of the network and other miners pour into make up that processing power to try to get the reward that remains. That's the game theoretical explanation or the game theoretical outcome that is most likely. So number two on our list of nine reasons Bitcoin has never been stronger, going into a halving, hash rate. There's another dimension of mining I want to talk about as well, though, which is

mining competition. There's so many indicators that mining competition is just growing. Miner Maker eBank filed for a $100 million IPO in the U.S. last month. On April 17th, MicroBT, which is a competitor to Bitmain, rolled out three new high-end Bitcoin mining devices. There's also new types of actors getting involved in mining. Great American mining company has come out live. They are a company that helps oil and gas producers in America build a digital pipeline for stranded gas. They help miners of traditional and or oil and gas producers use the excess energy that would just have to be flared off in the case of natural gas, for example, to power Bitcoin mining to recoup some of that value. I think that's a hugely

and potentially transformational business. For those of you who follow Marty Bent, he's involved with that. There's new excitement around even the American mining industry. There's so much new mining competition going on. I think that's incredibly bullish. Number four, accessibility and services. There's a ton that I want to talk about here, but long and short of it is that there has never been an easier moment to actually get onboarded and brought into Bitcoin in a meaningful way. First, we have a wave of Bitcoin-only services that have arisen in the last year even. You have River Financial. You have Swan Bitcoin.

You have CoinFloor, which actually switch to Bitcoin only. These are all services that allow people to get their first Bitcoin to routinize savings and dollar cost averaging into Bitcoin, which allow them to manage their Bitcoin. These are Bitcoin-only companies. They're not messing around with the casino model of altcoins that other exchanges took in the 2017-2018 boom. Instead, they're really focused singularly on this asset. That gives them an opportunity to focus on differentiated levels of service, differentiated types of products and services around Bitcoin specifically. So this Bitcoin-only service movement, I think, is hugely valuable for the quality of the experience for people who have come into the industry. But when it comes to getting

onboarded, if you don't happen to find your way to one of those comparatively smaller companies now, you also have Squares Cash App, which is as mainstream as it gets, and boy, oh boy, is it crushing when it comes to Bitcoin. We just found out yesterday that last quarter, $306 million of revenue of Squares Cash App, more than 60% of their revenue for the quarter, came from selling Bitcoin. That's up from 178 million in Q4. A huge, huge jump in this crazy, crazy horrible month that everyone experienced because of the COVID-19 shutdowns. Gross profitability of that Bitcoin doubled as well for Cash App. This is just huge. When you have a major mainstream financial application that is racing to beat out the Venmo's and everything else in this world,

you're going to have more people who don't know anything about Bitcoin coming in through that than just about anything we could invent in our industry. So you have both this incredible growth in Bitcoin-only services for people who come in, but then this amazing mainstream way for people to get their first Bitcoin. Number five, let's talk Bitcoin infrastructure for a minute. I mean, this is so obvious and so immense. This could be a dozen categories on its own. But let's just talk about three little areas.

The Lightning Network. Lightning Network is creating huge new opportunities for not only Bitcoin, but the reimagination of the web as a whole. By enabling smaller transactions, it allows for people to integrate Bitcoin into applications in totally new ways. In fact, you even have multi-coin capital just recently discussing the idea that Lightning may allow Bitcoin to be a better foundation for Web3, then the smart contract platforms they once thought would actually form the basis of that. There's so much we could say about Lightning, but suffice it to say that it is hugely differentiated in terms of how strong Bitcoin is now compared to any other having in the past.

There's also a wave of self-sovereign hardware. Hardware that allows people to actually take control over the hardware experience of Bitcoin and to participate to securing and supporting the network by running nodes. So you have Nodal, My Node, Razpie Blitz for running Bitcoin nodes and Lightning nodes. Just tons and tons of this independent self-sovereign hardware solutions, meaning that this isn't just a software and money revolution, but a hardware one as well. This is something that Marty Bent loves talking about. Another area that is huge that's been going on is the work on privacy, right? Bitcoin has not historically had privacy as a major focus, right? You can follow the flow of bitcoins, but there are lots of use cases that people don't want to have that

level of exposure. You have companies like samurai, join market, wasabi, all working on privacy solutions in the context of Bitcoin. So all in all, take this together and the infrastructure around Bitcoin has again never been better. Support for this podcast and this message come from ErisX. With ArisX, you can trade spot and regulated futures on cryptocurrencies through a licensed, U.S.-based exchange. ArisX believes in fair access for all. Sign up today to take advantage of zero fees and learn more at ArisX.com slash consensus. This episode is also sponsored by the Stellar Foundation. The Stellar Noges.

network connects your business to the global financial infrastructure, whether you're looking to power a payment application or issue digital assets like stable coins or digital dollars. Stellar is easy to learn and fast to implement. Start your journey today at stellar.org slash coin desk. Our final sponsor is Grayscale Digital Large Cap Fund. In times like these, diversification is key. Consider gray scale digital large cap fund, ticker symbol GDLC. It's the only publicly traded investment product that offers diversified exposure to large cap digital currencies, all from your brokerage account. For more information, visit grayscale.co slash coin desk.

That's g-r-a-y-scale.c-o-c-o-slash-coindex. Number six, institutional awareness. The infrastructure around Bitcoin isn't just for the self-savorn hardware crowd. There's also so much more for institutions and institutional investors than has ever been possible. In the wake of the 2018 crash after the 2017 boom in alt-coins, A lot of the focus in institutions was people like Morgan Creek Capital going out and behind the scenes trying to convince people and big buyers, right? Pensions, endowments, et cetera, to get off zero,

to have some exposure to Bitcoin. Well, it worked. And you know how we know it worked? Because when there was a huge market crash during the coronavirus, the first wave of the COVID-19 shutdowns and crises, Bitcoin crashed too. The reason for that is that, there was exposure to Bitcoin from investors who had to flee to cash. There's a famous maxim which holds true, which is that when you have to sell in a liquidity crisis, you don't get to pick what you sell. You have to sell whatever you can sell. Bitcoin just got washed up and caught up as part of that whole cycle. So although it was very painful, at least briefly, to see Bitcoin's price crash from 9,000 down to 3,800, in some ways it was a reflection of the fact that the last year and a half,

two years of advocacy inside institutions had actually succeeded. Because of that, we were more correlated in the short term with other assets because Bitcoin is liquid, right? So institutional awareness, it's a weird way to think about it as the evidence being Bitcoin's correlation in a crash, but I actually think it holds. I believe that a lot of those investors are going to want to come back. I believe that a lot of those investors, you know, some of them just bought a little Bitcoin hedge because why not? And that's fine. Others, I think, probably got into it and started to believe in it, but again, they were forced through their fiduciary responsibility to get out of it when they needed to just get to cash. So there's that whole side of things. What's more,

though, you have so many more institutions actually involved. You have the Intercontinental Exchange who's involved in the industry via their sub-brand backed now. You have Fidelity, who's built their Fidelity Digital Assets program. You have Eris X, which is backed by TD Ameritrade, NASDAQ, CME, and dozens of other traditional financial institutions. And that list goes on forever. There has never been the same amount of institutional awareness and legitimacy and participation going into a halving as there is today. Seventh, narrative relevance. You know I'm going to talk about narrative right now. And frankly, you heard it at the beginning from Brian Kelly. The first thing he said, the contrast between quantitative easing everywhere and quantitative hardening in Bitcoin is such a powerful meme. Yes, it may not

exactly describe the nuances of what these things mean, but the idea that everywhere around the world, the supply of fiat currency is increasing at the same time that the issuance of Bitcoin is decreasing is so massively and instantly resonant. And resonance is what matters when it comes to narrative. How quickly and easily and powerfully does a narrative resonate? I believe we've never had a moment where the narrative of Bitcoin is contrasted more strongly with what's happening in the world and the resonance that that creates is so palpable. You can feel it right now. You can feel it in these text messages people are getting from their friends and family. Even for those who aren't on the Fed is the devil and we're going to hyperinflation train,

it's hard to not see that contrast as something that makes Bitcoin more interesting. Which gets us to our eighth point, the perceived strength and resilience of Bitcoin. A tweet from Scott Melker, I think perfectly sum this up. He said, Bitcoin is resilient AF, 10,000 to 3,800 to 9,000 in the blink of an eye. That really nails what has happened over the last month. This is literally the only asset in the world, it feels like, that didn't get a bailout. It's certainly, as many have put, as Dan Tapiero said on this show, as Mark Yusko said on this show, it's the only truly free market left. Bitcoin didn't get a bailout, it didn't get any support,

it didn't get any help, and it's doing just fine. It is the definition of anti-fragile. And the important thing is that this isn't just perceived resilience, it is real resilience. It's true, right? Here are a couple examples of how we know. Coinbase, in the wake of Black Thursday, when that price crashed down to 3,800 very briefly. A preponderance of the transactions on Coinbase, base were buy orders. It was the hoddlers that formed the base of the Bitcoin community scooping up that cheap, delicious Bitcoin at those prices. The point is that something like 76% of the transactions were buy transactions, which is up significantly from the average. What's more, Willie Wu pointed out recently that it's also Bitcoin whales who have been accumulating steadily

since January. So all of these things come together to show both a perceived and a real resilience in Bitcoin. Which brings us to our last point, and I want to talk about this idea of anti-fragility again. The Lindy effect is the idea that the longer something lasts, the more likely it is to continue to last. Effectively, that things get more durable the longer they survive. Put differently, every additional period of survival implies a longer remaining life expectancy. This idea of Lindy effects is particularly important to Bitcoiners. Bitcoin has been pronounced dead hundreds and hundreds of times, and each time it comes back. And the relevance of that is that each time it comes back, some percentage of people who saw

that it was dead previously, who saw their favorite news outlet or their favorite business commentator call it dead, and then discover that it is not only still alive but thriving, start to become more interested or start to become more of a believer. So basically, Bitcoin's survival predicts for its future survival by attracting more people who previously heard it was dead. And in a lot of cases, there's a Lindy effect element to all eight of these other factors that I told you before, right? Like, of course the price should be higher four years on.

Of course, the hash rate should be higher and more miners should be involved. But that's kind of the point. The point is that the longer Bitcoin survives and, in fact, thrives, the more likely it is to survive and thrive in the future by very much. virtue of the fact that it attracts its fact of survival, its fact of thriving, attracts and brings more people in. The point of all of this is that Bitcoin has never been stronger going into a halving. You can feel the excitement, it's palpable. And by the way, and this is a really important point, this doesn't mean that we should expect to see some massive increase in the Bitcoin

price right after the halving or even weeks after the having or months after the having. That's not the point. The point for me is that the having is this incredibly symbolic, on top of its important function in the economic and monetary policy of the system, that creates an opportunity for new people to understand what makes Bitcoin different and FOMO into this space. The point of the having is to increase demand on the same time that we're decreasing the issue. It's decreasing supply. Eventually, increased demand and decrease supply leads to price increases. But in the short term, that doesn't matter. I don't care if every new person who discovers Bitcoin and gets excited about it doesn't buy a ton right away.

It's highly likely that those new buyers won't move the needle. The point is that they're paying attention. The point is that they're in the community. And the point in why Bitcoin is so much stronger now that in any point in its past is that there's so much more for them to find, to discover, to use, to interact with, to build upon than there has been in the past. So it's a really exciting time for Bitcoin. And it's really hard to deny that.

Anyways, guys, a fun little Bitcoin-having episode for your Thursday. I appreciate you listening, as always. So until tomorrow, be safe and take care of each other. Peace, guys. And one more thing. Just after I finished recording and sent this over to be edited, we got news via Bloomberg that Paul Tudor Jones, who's one of the most legendary, well-known hedge funders in American history, disclosed in his investor's letter that he had purchased Bitcoin. I haven't had a chance to read the letter. It hasn't been released yet, but he said that Bitcoin reminds him of gold in the 70s and called it a great hedge against, quote, great monetary inflation. I mean, this is everything that we just discussed all together.

Narrative relevance, true relevance, institutional adoption, infrastructure. This is a big deal. and you're going to see a lot of news about this, so I couldn't let it pass without at least mentioning it.