Bitcoin’s Ground Zero

Bitcoin’s Ground Zero

The Bitcoin Collapse

 

 

Source: one month performance - Coin360

 

It’s going to get worse before it gets better.

Within one month, Bitcoin has dropped a massive 45.92% to below the $3,500 support as well as the crypto-twins ETH losing 56.71% and XRP sliding down 40.26%. On several occasions, the three major cryptos have rebounded again to higher levels only to be followed by subsequent drops.

Bitcoin frees people from trying to operate in a modern market economy.

 Tim Draper


Trading Bitcoin is like riding a 1000-pound bull in a Texas rodeo show.

Fundamentals are non-existent due to the decentralized and borderless characteristics of Bitcoin, and no central bank controls or can influence the value of Bitcoin in any way unlike real fiat currency where monetary policy can be adjusted through interest rates and tightening of the money supply.

In this respect, central banks provide a valuable service to the economy of a particular country and for major industrialised countries, a great balancing act to the global economy.

Technical trading of Bitcoin is very challenging and not necessarily useful with a financial instrument that fluctuates up and down in wild swings within a short timeframe.

The only really useful financial indicators that can be used in technical trading are volume, support & resistance levels, and the production cost benchmark which is mining, and in particular, the cost of electricity.

China rules Bitcoin

China has in the meantime established itself as the Bitcoin mining capital of the world, commanding a dominant 71% of the global mining collective hashrate – a measure of a miner’s computational power - through its massive mining pools, even though that in 2017 China banned Bitcoin and all cryptos as well as ICOs (Initial Coin Offering that use crypto and smart contracts as a means of payment and transfer of value).

Crypto mining requires heavy-duty computer hardware that is manufactured as ASIC (Application-Specific Integrated Circuit) mining rigs which have a high consumption of electricity, hence cheap, subsidised or hydrothermal electrical power is the common denominator for all crypto mining.

By quick comparison, the crypto-mining costs of major crypto-producing countries:

China    - $3.172

Russia  - $4.675

Iceland  - $4.746

US         - $4.758

Establishing a crypto-mining cost “benchmark” is very challenging as the costs of mining Bitcoin varies wildly, from the cheapest which, surprisingly, is Venezuela at a mere cost of $531, to a stunning $26,170 in South Korea (market data provided by Elite Fixtures on 11/05/18).

What makes this even more interesting, South Korea has one of the cheapest electricity cost in the world of a mere $0.12/kW – that’s 12 cents – and ranks in 4th cheapest in the global ranking by Statista.

Apparently, South Korea is an outlier in Bitcoin production cost or there is a distorted correlation between the unit cost of electricity and the actual total production costs which would also factor in labour costs, import tariffs and maintenance of ASIC mining rigs, as well as taxation.

China comes in second last at $0.08/kW and the most cheapest of all is Argentina where 1 Kilowatt of electricity costs a mere $0.01/kW – that’s only one cent on the dollar.

Extremes excluded, the average crypto-mining costs range between an estimated $3,000 - $6,000

Apart from electricity costs, other factors that come into play are ambient temperature (for the cooling of mining rigs), maintenance of mining facilities and labour costs which makes China the cheapest country in the world to mine Bitcoin (or any other crypto). China takes crypto mining efficiency even one step further by using the “burning energy” of extremely cheap and subsidized coal supplies for crypto mining.

Contrary to popular belief, Bitcoin mining is even more ecological and sustainable than the production of gold which leaves a much bigger carbon footprint than crypto.

Secretive and isolated North Korea, which is not mentioned in any research or global statistics, would probably beat both China and Venezuela because of extreme low labour cost and subsidised coal and hydroelectric power.

As an “unwelcome” bonus, North Korea’s extreme cold weather and resulting cold ambient temperature within crypto mining facilities, is another very useful cost reduction aspect, as cold temperature is beneficial to the cooling down of mining rigs and this reduces electrical consumption even more.

The secret to China’s Bitcoin domination is actually “centralisation”, the exact opposite of what Bitcoin stands for, borderless and decentralised.

But having so much crypto-mining power “centralised” in any single powerful country such as China, exposes Bitcoin to a worrying degree of political risk.

Should one day the Chinese government decide to crack down on Bitcoin (or all cryptos for that matter), maybe perceiving crypto as a threat to the Chinese economy or as an unwanted competitor to their own planned digital sovereign currency, China could wreak untold havoc on Bitcoin and crypto in general across the globe. And crypto unpredictability is really the last thing that adoption of crypto into mainstream needs.

G20 Crypto Taxation – A Blessing in Disguise

 

We will regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF standards and we will consider other responses as needed.

G20 official declaration (Dec. 2018)

At the recent G20 summit in Buenos Aires, the first steps of global crypto taxation and regulation were extensively discussed. This a positive development in every sense of the word, as taxation at a global level would result in the main stream adoption as well as transparency of crypto currencies and more importantly, traceable money flow.

Presently, Bitcoin and many other crypto currencies, still suffer from the stigma of being “dirty money” associated with money laundering and crime. While a lot of money laundering still takes place using Bitcoin and other crypto currencies, authorities around the world have woken up to this reality and are actively pursuing illegal money transfers across the world with occasionally, a major bust or publicized success story.

Bitcoin, which is borderless, decentralized and based on public blockchain, gives investigators the possibility of tracing large quantities of Bitcoin movements and corresponding wallet addresses, however identifying the owners of a wallet is an entire different story because Bitcoin transactions are veiled in anonymity. Only a concerted effort by a dedicated team of Bitcoin experts can trace the flow of sizeable Bitcoin transfers across the world and most countries do not have the resources – financial or manpower – to pursue this time consuming and arduous activity at present.

Taxation will be the ultimate game-changer as it will compel the holders and custodians (crypto exchanges and wallet providers) of crypto currencies the duty of disclosure. Failure to do so, would not only make the holder liable, but more importantly, the regulated custodian of the crypto funds. As these custodians are more easily traceable by virtue of their functional online exchange or platform, the onus of reporting falls primarily on the custodian who then, by law, could be investigated, prosecuted, fined, jailed, barred or shut down.

Of course, at present, there are many loopholes and run-arounds to concealing crypto transactions and hiding crypto funds, but the taxation aspect will definitely put crypto on the radar screens of tax authorities and judiciary alike.

If anyone doubts the determination by certain tax authorities or the possibility of getting caught, try the Internal Revenue Service of the United States.

The Foreign Account Tax Compliance Act (FATCA), which was passed as part of the HIRE Act, generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on “withholdable payments”.  The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.

 

Source: IRS

The IRS has enforced FATCA in many countries and jurisdictions around the world and has succeeded in catching many “tax dodgers” (American for tax evaders), money launderers and criminals. The IRS can wield so much power that in 2009, it even forced secret banking paradise Switzerland to succumb to IRS enforcement and humiliate the mighty UBS (Union Bank of Switzerland) to disclose and reveal the private bank account information of 52,000 US citizens, even that these accounts are protected by stringent Swiss banking secrecy laws. After investigation and being formally charged for “aiding and abetting” tax evasion, UBS was forced to settle and pay to the US Dept. of Justice an astronomical $708 million fine – officially titled “limited deferred prosecution agreement” – in order to keep it’s US branches and banking activities operational.

By any measure, the IRS strategy was “borderline illegal” but enforceable using one “magic” trick, non-compliance by any foreign bank meant that they would be barred and excluded from operating any branch within US territory, a draconian measure that yielded incredible results. Many American UBS tax evaders prosecuted by the IRS now spent their Christmas in jail instead of the Swiss alps, and the US government has now set a precedent that has been followed by other countries such as Germany, France, Belgium and Israel.

On a global scale, enforceable by agreed multi-lateral tax treaties, catching and prosecuting tax evasion could yield massive fines as well as in the world-wide recuperation of untaxed money in the form of digital assets or currencies. Easily catching tax evaders is a tax man’s dream-come-true.

Global Crypto Regulation 

The “definition dissonance” of Bitcoin and all cryptos as it presently is classified by the respective US Federal authorities:

SEC - Securities and Exchange Commission - security

IRS - Internal Revenue Service - property

CFTC - Commodity Futures Trading Commission - commodity

FINCEN - Financial Crimes  Enforcement Network - money

It’s not that these fine American governmental institutions lack a dictionary or don’t know how to define crypto, it’s that their charters prevent them from regulating an asset class or financial instrument that has not been clearly defined or doesn’t fall between the parameters of their jurisdiction. Crypto is all of the above definitions in one form or another, and in one setting or another, depending on jurisdiction and applicable law.

If crypto cannot be defined exactly on a agreed global scale, then regulation on a global scale is virtually impossible.

Whale Watching and Crypto Mining

As Bitcoin crashes through each support, the fall seems unstoppable, but at certain levels, the three major cryptos seem to find strong technical support.

Bitcoin hovered around $6,400 support for quite some time and currently is hovering around $3,500 level, occasionally dipping below the crucial support level - as well as Bitcoin-mining cost benchmark - of $3.200

Once Bitcoin breaks below this crucial $3200 support, it may free-fall all the way down to between the $1,000 - $1,500 level.

The Bitcoin mining is benchmark is of crucial importance because below that support level, Bitcoin mining is no longer economically viable for more than 95% of the global mining industry. With China dominating the biggest market share of 71%, and its biggest pool AntPool commanding a massive 21.9% hashrate, followed by BTCtop 13.8% and F2Pool 8.6%, the stakes are high.

As Bitcoin mining developed from “solo-mining” to “cottage industry”, and now to “industrial-level”, the rules of the game have changed. Bitcoin miners are not only collectively organized into mining pools, by combining resources and banding together, they can effectively control the supply of Bitcoin and by extension, influence the price of Bitcoin to a certain extent.

The more the Bitcoin price drops, the more miners that go out of business and this unintended side-effect has been picking up pace since the Bitcoin hard fork back in November 2018.

In an article posted on CryptoWatch (04/12/18), according to Atulya Sarin, a professor of finance at Santa Clara University, who has written on the subject of currencies in his book “Foundations of Multinational Financial Management” states that, if Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral. That is, without the mining activities supporting the ledger that maintains the records of who owns what — bitcoin is, after all, a set of encrypted numbers that cannot establish the ownership of anything — bitcoin will become worthless.

Bitcoin whales on the other hand are not going stand by idly and watch their massive crypto holdings evaporate, they will simply sell as the bitcoin price drops and buy up large quantities at the bottom of each Bitcoin price cycle.

The Nutty Professor

 

The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. It is no coincidence that dysfunctional Venezuela is the first issue of a state-backed cryptocurrency, the Petro.

 


Kenneth Rogoff

 

Chess Grandmaster, former IMF chief economist and Harvard University economics professor Kenneth Rogoff has characterised (in The Guardian newspaper - Dec. 2018) Bitcoin as “nutty” and a “lottery ticket” stating its long-term value is “more likely to be a $100 than $100,000”!

Recently, the CEO of Allianz Global Investors Andreas Utermann joined in the Bitcoin-bashing chorus by calling for all crypto assets to be “outlawed”.

Meanwhile, Bitcoin advocate and contrarian Tom Lee has stated that “the fair value of Bitcoin is significantly higher than its current price, and that it could reach as high as $150,000”.

Truth be said, no one really knows where Bitcoin, Ether or any other crypto is heading to, but one thing is for sure, after the end of the ongoing collapse, Bitcoin will surely rise again.

And as politically incorrect as it may sound to crypto proponents, Bitcoin will always have a “use-case”, if not for the legitimate transfer and storage as a “legal” digital currency, then definitely for illegal activities such as money laundering and the transfer of criminal money, unless urgent global regulation is set in motion to prevent this.

Bitcoin’s Rising from the Ashes

If you got time, it will arise. It will not happen within three months, or one year, but in two to three years, and this is the Golden time to be in crypto”.

Tom Lee – Fundstrat Global Advisors

  

The future of Bitcoin is shaky at present, the are just too many opponents and proponents on both side of the divide.

The lower the price of Bitcoin, the more panic selling by crypto-miners to recoup their investments.

Crypto whales on the other hand see the current Bitcoin collapse as an opportunity to buy Bitcoin and other cryptos at the lowest possible price levels, hoping and anticipating for a massive rebound to the magical $20,000 and beyond level.

Whatever the future has in store for crypto, Bitcoin will stand out as the one crypto-currency that defies gravity and weathers all storms.

The rise from the ashes is most probably going to be a long and slow climb back up and this will give Bitcoin believers the opportunity to enjoy another spectacular ride to previously unseen highs. 

That’s why HODL, as it is known in crypto circles, which means “Hold-On for Dear Life”, to all your Bitcoin and cryptos until next peak, and enjoy the ride.

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  • Chris Harper

    The day you go bearish I will buy bitcoin

  • Isaac Iwaszewski

    Bitcoin is going below $900 very soon..

  • Lee Hanlon

    BTC is King! I am dollar cost averaging. I am in no rush for the market to turn bullish. I am also buying as much NEO as I can. NEO decentralisation 2019 coming.

  • Ralph Baillie

    could be wrong, but I feel like it’s the beginning of the depression stage.

  • Brenden Thompson

    Without bitcoin there is no XRP.

  • Andrew Sotiriou

    If there's one thing I learned in crypto, it's that the majority is always wrong.

  • Jacob Heap

    Blockchain today is probably where the internet was in the 80's. We have a long way to go.

  • Marc McCartney

    This is the time. To buy.. But being very cautious... I cashed out a while back

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Eleftherios Jerry Floros

Tech Expert

Jerry is the CEO of MoneyDrome, a hybrid investment & trading platform enhanced by analytics, machine learning and artificial intelligence. He is also an entrepreneur, writer and speaker with a 30 year diversified background in finance, engineering and maritime. His main areas of interest are FinTech and digital disruptions, which profoundly impact the global economy as well as our personal lives. Mr Floros graduated from the University of Oxford and the Wharton School of the University of Pennsylvania.

   

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