Mad Hedge Bitcoin Letter
April 21, 2022
Fiat Lux
Featured Trade:
(SHOPIFY BOOSTS DIGITAL GOLD)
(BTC), (SHOP), (MCD), (WMT)
Posts
People aren’t going to wake up the next day and find that Bitcoin (BTC) is suddenly the de-facto global payment system.
There are steps that need to be taken for it to get to that point.
How I see it – the path to further adoption will go through the e-commerce systems in digitized form.
This makes sense on a lot of fronts.
It’s no secret that e-commerce is usurping the status quo of brick-and-mortar shops.
That process was accelerated by the health phenomenon over the past two years.
If Bitcoin get can the likes of Amazon to allow Bitcoin payment, then that would be considered a massive victory.
That needs to happen before government services or utility payments allow Bitcoin payments.
It also needs to happen before big government install regulations too onerous that it won’t come to fruition.
The short-term positive news is that payment network Strike has announced integrations with Shopify (SHOP), an alternative payment processor Blackhawk Network, which will make it easier for global merchants to accept Bitcoin payments.
Bitcoin Lightning Network, a second layer built on top of the Bitcoin blockchain, will convert BTC payments into dollars quickly, relieving merchants of complexities associated with actually holding Bitcoin.
I must admit, Shopify is no Amazon, but baby steps need to happen somewhere and Shopify is a reputable e-commerce company as it stands.
Yet Shopify’s $4.5 billion of annual sales is dwarfed by Amazon’s $450 billion in annual sales and that matters.
Scale is everything in tech and hitting singles doesn’t make quite the dent or simply will take too long for the results to become meaningful.
Shopify will be able to take advantage of previously untapped global markets and purchasing power, as well as save money with low-cost payment processing through accepting Bitcoin payments.
Merchants will be able to interact with the Bitcoin network, and users will be able to make purchases privately throughout the United States, taking advantage of the cheap, instant, and open access that Bitcoin offers.
More than 400,000 storefronts will now accept Bitcoin through the Lightning Network, and any merchant is welcome to join through SHOP.
What was once hard to imagine is now becoming a reality. The future looks like it will bring millions of storefronts across the US accepting Bitcoin in the near future. Other countries may follow suit after seeing the success of this nation-state Bitcoin usage.
Sadly, financial institutions have been woefully inadequate to meet the needs of an increasingly digital consumer, and it’s now evident they are generations behind.
If we really think about it, there has been no innovation in the payment systems since 1949.
The launch of the Bitcoin payment system has revolutionized and disrupted well-established traditional credit card networks like Visa and MasterCard, bringing a new financial world order.
Several examples show how crypto adoption boosted a nation's economy, including Argentina, which adopted Strike’s Lightning payments system and saw its GDP rise 10.3% in 2021, the highest rise since 2004. Another example is El Salvador, which adopted Bitcoin as legal tender with the help of Strike and saw its GDP grow by double digits for the first time recently.
I am eagerly awaiting McDonald’s (MCD) and Walmart’s (WMT) announcement that they will start accepting Bitcoin.
That will really move the needle.
If some of these big players come on board, Bitcoin will also benefit from reduced volatility as well inspire the incremental investor to hold Bitcoin as a store of value.
Yet the wait goes on as Bitcoin is slowly accepted around the world and the more sovereign nations and large corporations that come into the fold, there is no doubt in my mind that this will be a main driving force behind higher Bitcoin prices.
Mad Hedge Bitcoin Letter
April 19, 2022
Fiat Lux
Featured Trade:
(HASH RATE COLLAPSE)
(BTC)
It’s no secret that the price of Bitcoin is directly correlated to a growing hash rate.
These are truly one of the essential indicators of the underlying health of Bitcoin.
As buy and sell volume increases in the network, mining introduces more liquidity by delivering fresh coins, and the activity increases when more people buy and sell bitcoin.
This unwritten contract keeps supply and demand in check as the steady flow of newly minted coins lurches ever closer to the final tally of 21 million Bitcoin.
However, I never said there wouldn’t be bumps on the road on the way there.
It’s no coincidence that the price of bitcoin has been slowed down because of the exorbitant energy prices around the world.
Higher energy costs are having a ripple effect where crypto mining companies are adversely affecting by a slowing hash rate.
A developing and healthy mining infrastructure is critical to a higher bitcoin price and what I am seeing are short-term bottlenecks that can only be resolved with easing conditions.
What is hash rate?
Hash rate is the measure of computational power used to verify transactions and add blocks in a Proof-of-work (PoW) blockchain. Bitcoin, among others, utilizes mining to mint new coins and verify transactions.
Hash rate can represent the number of individuals or entities in the world participating in the process of mining. Therefore, the more people mining bitcoin, the higher is the hash rate.
Why is hash rate important in mining?
The mining process, which involves miners solving complex computational puzzles to add blocks to the blockchain, leads to a more secure network.
In addition, miners have an incentive to mine for higher prices.
This system of reward ensures that there will always be new coins added to the economy of bitcoin while keeping the integrity of the blockchain network.
Mining is a business and miners can’t successfully mine if expenses are high combined with a low bitcoin price.
Once a miner produces a coin, it’s common to sell that coin back into the marketplace to recoup the costs of running a mining operation.
Higher rewards lead to a virtuous loop of higher prices and higher revenue while the opposite results in a vicious feedback loop that turns into a downward spiral.
The hash rate has decreased by around 5% in the last few months.
The hash rate recovered well from last summer when China banned Bitcoin and miners fled abroad to restart operations.
These are the growing pains in order to stabilize a new asset class.
The infrastructure of a new asset class doesn’t get built in one day and hopefully, the hash rate can shrug off the latest pullback.
Yet we face an upcoming summer with spiking electricity prices across the world as one of the world's largest exporters of fossil fuels, Russia, is enthralled in a military conflict and global energy supply chains are being severed by sanctions.
Unfortunately, Kazakhstan, the 2nd largest Bitcoin mining country, is facing some more short-term squeezes as Kazakh authorities said they seized almost $200 million of equipment from crypto mining operations as they crack down on illicit mines.
Legally operating miners in Kazakhstan had their power cut off at the end of January, as the government grappled with energy shortages.
The withdrawal of capacity from Kazakhstan is currently limiting bitcoin's hash rate growth.
This might feel highly esoteric because these events happen thousands of miles away.
But it matters because Bitcoin is still vulnerable to supply shocks just like the global supply chains are.
Deteriorating hash rates could signal to traders to delay Bitcoin purchases and as Bitcoin is also fighting with other assets for fiat currency, the incremental trader could be inclined to pay for groceries, gas, and housing before they dip back into the crypto market.
If the hash rate starts to tick upwards as we head into the summer, this could be the genesis of a Bitcoin rally.
Mad Hedge Bitcoin Letter
April 12, 2022
Fiat Lux
Featured Trade:
(PETER THIEL STICKS IT TO THE INSTITUTIONS)
(BTC), (PYPL), (BLK), (BRK-B)
Bitcoin has many doubters, something so novel usually does.
Most Baby boomers who have made it big really have no incentive to get rich again, that’s why many aren’t even inclined to listen to its Bitcoin’s pitch.
To most of the boomer success stories, their financial overperformance was underpinned by the US dollar.
The US dollar isn’t your father’s US dollars.
The destruction of purchasing power has roiled the US dollar and now it has become a target to topple.
Clues are there from Russia desiring to settle energy contracts in Russian Rubles.
Saudi Arabia is in talks to do deals with China in the Chinese yuan.
Unsurprisingly, it’s almost natural that successful Americans born during the peak of the US dollar stick to that as a secret sauce.
For the younger generations, the case is a lot more muddled as billionaire PayPal (PYPL) co-founder Peter Thiel shared his list of enemies stopping bitcoin from rising 100x Thursday while speaking at the Bitcoin 2022 conference in Miami, Florida.
The enemies are “a list of people who I think are stopping bitcoin,” he said. “There’s a lot of them, they tend to have nameless faceless bureaucrat perspectives, which is of course one of the ways they hide.” Thiel continued:
We are going to try to expose them and realize that this is sort of what we have to fight for bitcoin to go up 10x, 100x from here.
“The central banks are going bankrupt. We are at the end of the fiat money regime,” he said.
The first person on the list was Berkshire Hathaway (BRK-B) CEO, Warren Buffett. Thiel put up a picture of Buffett with two of his most famous quotes about bitcoin: “rat poison” and “I don’t own any and I never will.”
It’s fascinating to watch from afar, a war of great minds, and Peter Thiel and Warren Buffett are two heavyweights.
Thiel has had the propensity to behave riskier with his bets which is normal for early-stage tech investors.
He co-founded PayPal, was an early investor in Facebook, and has numerous connections to influential politicians.
Thiel wasn’t talking to the existing Bitcoin base which many are diehards.
He was talking to the incremental investor sitting on the fence.
I understand it’s a leap of faith to jump into a digital currency that produces no cash flow or income.
It’s hard to do mental gymnastics.
Thiel most likely came across as too zealous, painting the dilemma as a binary choice between Bitcoin or fiat currency.
The truth is that both of these can succeed in the future for two entirely different reasons.
They also attract different types of investors which is the beauty of investing.
The next picture he put up was of Blackrock (BLK) CEO Larry Fink, who has been quoted saying Bitcoin is an “index of money laundering” and who also presides over $9 trillion of managed money.
Ostensibly appearing as if this is a binary choice placing the biggest beneficiaries of the fiat monetary system in this generation is more of a dramatic effect if anything else.
The truth is that Blackrock’s Fink is starting to change his tune about Bitcoin and his firm Blackrock is looking into how they can make money for the clients using not only equity funds.
Many of these guys on Thiel’s list have fiduciary responsibilities to their shareholders and throwing $9 trillion at Bitcoin would violate any sort of risk control.
Instead of alienating institutional money, Thiel has chosen an undiplomatic way to call out the corporate money that hasn’t bought into Bitcoin like retail investors.
Bitcoin has stayed very much in the limelight in 2022 and it’s clear that as a $2 trillion industry, it’s not going away.
Ultimately, Bitcoin’s price action has been somewhat disappointing since its surge to $65,000 last year, but that doesn’t mean it is a failure.
Consolidating and digesting a giant gap up is natural.
The technical support at $38,000 has held up nicely, and Thiel’s call to action to take it back to $65,000 won’t move the needle in one day but alerts many billionaires that if they miss this ride up, it might be the biggest missed opportunity of a lifetime.
Mad Hedge Bitcoin Letter
April 7, 2022
Fiat Lux
Featured Trade:
(JANET PUTS IN A GOOD SHOWING)
(BTC)
Digital assets climbed the wall of worry surpassing a market cap of $3 trillion only just last November and that is just a small taste of things to come.
It was only at $14 billion just five years before that and sure, it’s retraced somewhat back to around $2 trillion in market cap now, but the proof is in the pudding.
When conditions align yet again in a quantitative easing type of way, expect the price of Bitcoin to take off.
Imagine how well Bitcoin is doing in an aggressive tightening cycle, stubbornly staying over $40,000 per BTC, it has proved its worth as a store of value.
US Treasury Secretary Janet Yellen dived into the topic of cryptocurrency at a speech the other day and much of what she talked about was net positive for the asset.
This will go a long way to legitimizing the digital token because this level of power broker also has the clout and authority to shut down an industry like cryptocurrency.
Yellen referenced the onset of the Internet in the early 1990s as an analogy for crypto, Yellen said while digital assets may be relatively new, they are part of the larger trend of the digitization of finance that has been in the making for decades.
I wouldn’t quite lump in crypto with the rest of digital finance, it’s quite a different animal yet if that is what it takes for her to understand what it is, then more power to her.
Yellen believes the development of digital technology can help create a more efficient payment system with instantaneous transactions and lower costs.
She also mentioned sizing up the risks, not technologies, and I would argue that the risk of not greenlighting crypto at the Federal level means that a country like Russia could forge ahead in crypto development.
What I liked about Yellen was she began to normalize the currency in terms of describing it as the next piece of financial development in a long history of digital progress.
Almost nothing she said felt like she would suddenly make a u-turn and squash the whole process.
She again pulled out the “caution” card which is really a central feature of bureaucrats and ensured the public that there won’t be any snap decisions made any time soon.
I am still not sure if this will be a kick the can down the road type of phenomenon, but she has left that possibility open as well.
What she plans to do is to sit back and allow the technology and the risk levels to emerge then to prove to her whether its ready or not so taking a passive role in this matter also means that the government will treat this as a slow play type of deal.
The last issue she brought up is the systemic risk aspect of cryptocurrency and if this asset could withstand widespread stress.
The Federal government will need to develop certain processes and mechanisms to solve contagion in the markets.
If one firm fails, then surviving a fatal blow to the overarching system is paramount.
Unfortunately, I believe Yellen is not suitable for safeguarding and promoting cryptocurrency.
Although she didn’t do anything overt to shut down the progress of crypto, it seems like she is biding her time in office until someone younger can come in who actually knows a thing or 2 about crypto.
It’s painfully obvious when someone has a scant idea of how crypto functions and Yellen is one of these people.
She simple is a bureaucrat placed in the Federal government at this particular time when crypto is developing wildly and she must answer to it because her position requires her to do so.
Only the real crypto people know what is going on.
The bar has been set naturally low for her and she succeeded.
In the meantime, crypto will keep developing and the price of Bitcoin will grow parallel to the inertia in Washington.
Mad Hedge Bitcoin Letter
April 5, 2022
Fiat Lux
Featured Trade:
(ETHEREUM’S WILD RIDE)
(ETH), (BTC)
The price of Ethereum has doubled from $1,800 last July to $3,500 today.
Throughout this newsletter, I have been preaching to readers that price appreciation will be higher in Ether than it is in Bitcoin.
Ethereum simply has better technology and is a better bet in the long run and sadly for Bitcoin, they are further along in their maturation cycle therefore the explosive up moves are confined by the law of large numbers.
It was simply almost a given that Ethereum would go from $1,000 to $3,500 and it’s really only a matter of time until they break $5,000 and then $10,000.
This is the second most popular cryptocurrency and although not a great store of value yet like Bitcoin, its fan base is growing by the day.
Here are a few answers for Ether fanatics from typical Ether questions.
Crypto investors always need more fine-tuning and know-how about cryptocurrency.
ETH is a great buy-the-dip opportunity for crypto diehards, and I believe there is clear sailing until $10,000.
Frequently Asked Ethereum Questions
Where's the best place to buy ETH?
There are many centralized exchanges that support Ethereum. If you live in the US, the most frequented exchanges are Coinbase, Gemini, and Kraken. Coinbase users can use Coinbase Pro for lower fees.
When is Eth2 launching?
Eth2 is a marketing term used to represent a number of updates to Ethereum. The Eth2 proof-of-stake chain was first launched in December 2020. "The Merge", which is the event that will fully switch Ethereum's consensus to proof-of-stake, is estimated to be ready in early 2022, although there is no exact timeline. Other updates, such as data shards, will follow that update.
Do I need to do anything to update to Eth2? Will Eth2 create a new token?
No, ETH holders never need to take any action to keep holding ETH. Ethereum users will be unaffected by the Eth2 upgrade. And the Eth2 updates will not create any new tokens.
How can I stake my ETH?
There are two ways that you can stake your ETH: by either running your own validator or providing your ETH to a staking pool.
Running your own validator requires a modern computer and 32 ETH.
Staking pools accept any amount of ETH. I recommend Lido or StakeWise.
Why are Ethereum transaction fees so high?
Like most blockchains, Ethereum fees are determined by supply and demand. The large demand to use Ethereum has pushed transaction fees quite high (however, fees were just a few cents only 2 years ago). Fees are especially high during market volatility, and during NFT drops.
What is being done to lower Ethereum transaction fees?
Ethereum fees are reduced by using layer-2 rollups. Rollups are scaling solutions that allow for significantly cheaper transactions, while still maintaining Ethereum's security.
Additionally, Eth2's data shards will make rollups even cheaper.
While rollups are cutting-edge technology being actively developed, a number of them are already live on the Ethereum mainnet.
What's the best wallet for Ethereum?
The most popular tool for using decentralized applications is Metamask. However, for security reasons, I recommend using a hardware wallet such as a Trezor or Ledger.
