The Breakdown - Bitcoin vs. QE Infinity: The 4 Archetypes Of The Halving Debate

Episode Date: April 27, 2020

The bitcoin halving is just two weeks away. While the COVID-19 crisis pushed attention off the momentous event for a while, the discussion is coming back fast and strong. Google searches for the bitcoin halving already exceeding the 2016 peak, despite almost no mainstream media coverage.  In this episode, NLW breaks down 4 archetypes of people within the larger debates around the bitcoin halving: Speculators - those who flock to Twitter to engage in endless rounds of debate around the efficient market hypothesis and whether the halving is priced in or not Fundamentals - those who believe that what matters about the halving isn’t the short-term price movement but the fundamental decrease in supply Miners - those who have to actually figure out how to make their business model work in the context of reduced issuance Symbologists - those who are focusing on the significance of bitcoin’s issuance reduction coinciding with QE infinity   

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Monday, April 27th. And this week, I'm actually working on an additional micro series to go alongside the breakdown, the normal run. And so I'm a little bit more busy than usual with that. And so some of these episodes will be working on. be a little bit shorter, a little bit more fun, a little bit more punchy than what we've had over the last couple weeks. Hopefully you still enjoy it. I'll be sharing more about that new micro series in a few days. I'm really excited about it. I think you'll enjoy it. It's got some tweaks to the normal podcast format around some very current and contemporary issues. But anyways, what that means is that I have a

little bit less time to produce this than normal. And so I wanted to do something fun today based on a rising trend that I'm seeing. In January, before the coronavirus really hit our field of vision and our focus, the thing that we were talking about most in the Bitcoin and crypto world was the Bitcoin halving. There was a serious debate, which of course has continued, but I think the volume has turned down a little bit on, around whether the halving was priced in. And more broadly, just what the implications of this Bitcoin having were, right? What it meant for Bitcoin that the reward was going to be cut in half. Did that impact things? Would that impact things in a way that was positive or negative? And what were we talking about when we say positive or negative? Are we talking

about security of the network and minor capitulation? Are we talking about price? The default is that we're talking about price. But that was the state of the debate. Along comes coronavirus, taking out economies with it, and that's been the focus, right? The macro context for Bitcoin has been the focus. But we are now something like 14 days away from the halving and the conversation is heating up again in a big way. And you can feel it on Bitcoin Twitter where this is really starting to come back into focus. We're seeing moves from industry. And as we'll see later in this episode, I think it also has to do with a convergence with that macro narrative. So what I want to do today is talk about the four archetypes of people in the halving debate. Speculators, fundamentally,

minors and symbolologists. So let's dive in. First up is speculators. And I purposely have not actually divided this into people who think the having is priced in or people who think that it isn't. I'm including this entire group as the folks who are engaged in this debate in the context of this priced in question. There are, as you might imagine, a bunch of different sides and a bunch of different takes. But regardless of what take, people tend to feel very passionately. Last week, the crypto dog tweeted, do you think the halving is priced in? Be honest. Hundreds and hundreds of comments later, the vast majority of them are either, yes, of course it is,

you idiot, or no, of course it isn't, you idiot. This is a very clear, strict divide and point of contention. Blockfolio did a poll. They actually did a poll in app as well as a poll on Twitter. So the Twitter poll is the Bitcoin having already priced in. This was last week. Yes, had 27.2%. No said 51.8%. And I'm not sure said 20.9%. The in-app poll had very similar results, but spread across 10,000 people. Now, in terms of the actual content of the debate, a key question has to do with the efficient market hypothesis. The efficient market hypothesis is basically the idea that when markets know information, they price it in in advance. And price shifts have to do with new information coming online. So people who believe in this efficient market hypothesis, and by the way,

I've radically oversimplified it, tend to think that because this having is a known event, it is priced in currently, right? The market knows that this is happening. They know what it will do. And so by extension, they have accumulated and put that information into the price considerations currently. In January, Nick Carter actually wrote a phenomenal piece called an introduction to the efficient market hypothesis for bitcoins, which, regardless of whether you come to the same conclusions that Nick does, you will find it extremely elucidating, I believe. He comes to this conclusion. He says, so is the having priced in, or will it be a catalyst for appreciation?

If you've read this far, you will understand that I consider it patently absurd that a change in issuance will have been overlooked by the price-setting entities. On the other side of this is Plan B, 100 trillion USD on Twitter and his stock to flow ratio. And that's a whole different side of the debate, which obviously has a whole additional group of adherence. Interesting follow-up to this I saw from Guy Swan, who really, you know, in some ways Nick and Plan B became the lightning rods for either side of this in January. And Guy Swan tweeted out and wrote a really interesting comment where he said,

I feel the market fails to evaluate the consequences of the having. So basically, his argument is that people know that this having is happening, but they are not doing a good job of understanding the consequences, what will come after it. There's so many sides of this debate, and I wanted to point out two things. First is that it's a fun debate to have, and I think it's a reasonable debate to have, and something that is, you know, we'll find out later, but there's a good healthiness to this debate. Second, the best of this debate is an unbelievable example of how rich the Bitcoin and crypto community is with willingness to share huge amounts of thoughts and information in incredible detail. These pieces that have come out about this are so educational and useful for someone who's trying to kind of

grok this. And it just doesn't happen the same way in other industries. These are people who are sharing their perspective and mental models that they've developed a huge amount of time building. So I love the debate in some ways because it produces this incredible amount of knowledge sharing. But archetypes of the having debate, the first, and I think all of us are a part of this to some extent, is the speculators. Next up in this archetypes is the fundamentalist. And I realize actually after starting this podcast that I probably should have chosen a different name,

given how fundamentalist is used in a very negative way in every other context. But by fundamentalists, I mean people who believe that the key thing here is, is the fundamental properties of the having. The idea that, in other words, Bitcoin is a system where the issuance rate declines while everything else increases, and that that fundamentally is the key factor, that if supply goes down and demand goes up over time, price goes up to, and that presuming demand going up over time, a supply reduction is going to have a positive impact on price. There are a million examples of this. I think Jan from Swan Bitcoin articulated this really well on the podcast on Friday. But I saw another example on that thread from the crypto dog that I was

telling you about where Ceteris Paribis, who by the way is one of the most criminally underfollowed accounts on crypto Twitter, wrote, define priced in. BTC's hard cap with declining new issuance will cause price to go up over time as more people store wealth in BTC. So that's the point of the fundamentals, right? the fundamentalist argument is that there is the property of the system, which is reduction of issuance, which creates a supply constraint, which makes it more attractive for its stated purpose of being a store of value, a store of wealth, which creates more demand, which, when combined with that reduced issuance, that hard cap on supply, creates price pressure. I think it's important to articulate this, even though it's kind of

obvious to people because this group is sort of staying out of the fray, I think. You know what? I actually take that back. I think a lot of the speculators are also at heart fundamentalists too who just like a good dust up on Twitter. But the point here is that there is this belief set from a lot of folks in this community that the key factor isn't whether the price goes up or down in the immediate post-having environment, but the fact that the having itself, the fact of the having, creates context for price increase because of its properties in the system. So that's number two, the perhaps poorly named fundamentalists. Number three is the miners themselves.

Let's not forget that in terms of immediate impact, the people and groups with the biggest amount on the line are the miners themselves, whose business model needs to account for a fact that half of their expected output from their activity is now being cut. This debate is really interesting. think, and maybe even a little bit more informative, perhaps, than the normal price go up, price go down, speculator debate. Last week, Patrick O'Shaughnessy wrote, Bitcoin getting crushed at the halving would be a very appropriate 2020 thing. Keep in mind, by the way, that I don't think Patrick

was rooting for this. I think he was talking about how topsy-turvy the world is. But then he followed it up with an interesting response to this in my DMs, shared with permission but without attribution on why having is in fact bearish. I'll read this DM that came to to Patrick because I think it's a useful note in this conversation. Income to miners falls sharply, emissions cut in half. Then difficulty will adjust downward partially but not fully mitigating this. The most efficient miners capture more market share, the least efficient leave the game. The extra competitive pressure means, A, miners need to invest more in ASICs and other costs to stay competitive, and they'll sell some BTC to finance that. And B, a more precarious financial

position for miners generally makes them more risk-averse, which means selling some BTC into If miners were wildly profitable today, none of this would matter much. But many are just marginally profitable, and at the tail end of a 2.25-year bear market, their overall finances aren't great either. With all that said, this is all just one part of the puzzle. While I view the happening as a force to be bearish doesn't mean prices will go down, plenty of unrelated bullish forces. Key point here being an argument for why this might be bearish without rooting for it, without being a hater in any way. Plan B actually responded to this, and he says, Patrick for sharing this DM. It's a great example of minor capitulation slash death spiral

fud, fear uncertainty, and doubt. 2012 and 2016 having data shows that difficulty will not adjust downward, but will keep rising post-having. Miners have already invested in new hardware and are prepared for minus 50% revenue. So I think the interesting thing about this is that in some way it's saying that miners have priced this new cost in already, right? We're talking about whether things were priced in, whether things were known to markets in the speculators debate. Now we're seeing that in the context of miners where plan B is basically saying, look, miners know that this is coming. They're the ones who have the most on the line from this. So they're already investing to try to get out ahead. And you're seeing this in articles every day on CoinDesk and on the block where there's a

a hardware arms race happening. Another key point that Matt DeSuzza makes is about minor capitulation being bad or not. He says, remember, minors capitulating equals more Bitcoin is allocated to miners' best position to accumulate Bitcoin, removing cell pressure from the network. Which is a really key point, right? The idea that the miners who are not as efficient who aren't doing as well create more cell pressure because they have to sell more of the Bitcoin they mine just to keep functioning. So in this way, minor capitulation is not necessarily a bad thing.

It's part of the overall game theory in this. Now, all of this is theoretical and speculative, but what's actually happening? Well, for my view, from where I'm sitting, it doesn't seem like people are slowing down. It doesn't seem like miners are slowing down. In fact, it seems like they are heating up. Just today, we saw that Binance has announced a mining pool service. They said that it would be focusing on Bitcoin using full paper share or FPPS under this method, revenue from the block reward, as well as some of the transaction fees are shared among

pool participants. Future offerings will focus on both proof of work and proof of stake-based networks. So again, this is a finance getting in on some version of the Bitcoin mining game. We saw last week, MicroBT, which is a competitor to Bitmain, rolled out and announced three top-of-the-line Bitcoin miners who are trying to compete with and take market share from Bitmain. So we have competition on that front. Just last week, Marty Bent, announced a project that he'd been part of for months now called the Great American Mining Company, which is designed to help oil and gas producers build a digital pipeline for stranded gas, to use stranded gas to mine Bitcoin, which is just a phenomenally cool thing that I'm going to

have Marty back on the show to talk about that specifically now that it's live, sometimes soon, hopefully. Marty, if you're listening, I'm meaning to ask you about this. But anyways, The point here is that there is a ton of activity from the mining industry leading into this. So whatever pressures there might be, whatever potential bearishness, it seems to me more likely that this is a potential natural selection event, but not one that's necessarily bad for Bitcoin. So that's miners, the third and probably most important archetype in the having debate. The fourth and final category is the one that I kind of relate most to,

which are the symbologists. These are the folks who think that part of the significance of the having is in the context and with the contrast it makes to what's going on in the wider world, where the having matters not just for the internal system of how Bitcoin runs, but the external perception of Bitcoin in the world as it is. And to me, this is a hugely significant having for that reason. I think that it's hard to, overstate how dramatic the contrast is between Bitcoin reducing its issuance, at the same time as central banks around the world are absolutely trying anything possible to them to print what they've called, in the context of the Federal Reserve, unlimited cash, infinite cash. It couldn't make the contrast

clearer. And this is holding aside any debate about whether the Fed is taking the right action or not, the fact that there is this huge important event in Bitcoin, which is fundamentally about a reduction of its supply getting to an eventual hard cap, while the idea of a cap has been totally blown out of the water in the macroeconomic system is hugely important. And this has even got itself a name now. So last year in March, Schmeagle on Twitter said fiat equals quantitative easing, Bitcoin equals quantitative hardening. This was March 6, 2009. But a year later, more than a year later, this came back. Adam Back mentioned this idea, this term quantitative hardening, Terdemeister picked it up, and then Brian Kelly and other MSM figures retweeted it and said

they loved it. So there's a new term for the Bitcoin having, which is quantitative hardening or quantitative tightening. And I think that that as a meme value is so, so significant. You're seeing MoneyPrinter go burr as a meme that's extending far beyond just the Bitcoin or world. And as that's happening, Bitcoin goes through this halving event, you're going to have more people on the margins start to come over into this space and look into it. So this fourth category of people in the having debates are the symbologists who are focusing on that contrast, especially in the context of what's going on right now as governments try to avoid total failure and collapse of their systems in the context of COVID shutdowns.

It's a pretty significant moment. So like I said, guys, a little bit shorter, a little bit fun of an episode today. The four archetypes of the Bitcoin having debate are the speculators or gamblers or debaters or whatever you want to call them. The fundamentalists who believe fundamentally that the key part of the having is the fact of Bitcoin's reduced issuance and eventual hard cap itself and that everything along the way to that is just noise. The miners who are trying to deal with the outcomes of this for their business models and the

symbologists who are looking at what it means that Bitcoin is reducing its issuance on its way to a hard cap while the rest of the world is experimenting with unlimited cash printing. That's the idea. That's the podcast. Thanks for hanging out. I will be back tomorrow with another episode of The Breakdown. Until then, be safe and take care of each other. Peace.