Bitcoin’s Supply & Demand

During the past 14-15 months of Bitcoin’s price decline, much has been made of Bitcoin’s inflation rate … i.e. the speed at which new Bitcoins are discovered each day and, at least some of the time, sold into the market.  Currently 3600 BTC are created every day and the market must absorb this supply in order to maintain current prices.

Short sellers focused on this, especially when the price was >$500/coin, stating that there is no way current demand levels can absorb $millions of new bitcoins being sold every day.  Fundamentally, without huge hype as per late 2013, they have been proven correct … but at the current ~$235 level, the same argument becomes weaker.  Especially given recent changes in the market.

Firstly, at $235 per coin, fresh supply of bitcoins is valued at ‘just’ $846,000 per day. This sounds like a lot, until you divide it among 1000’s of individuals.

Supply and Demand

Secondly, the weak holders of Bitcoin have already been flushed out. If they didn’t panic sell at $200 or $180, it seems unlikely they will at $150 or even lower. The only way a short seller can push the price down is to temporarily create a large oversupply by scaring people into selling.  It would appear that their influence is waning.

Thirdly, more people than ever can buy bitcoins! itBit’s volume has increased significantly since it announced it was fully regulated in the US. Very roughly I’d say their volume has increased by 2000BTC/day.  Coinbase is also now US regulated – at least in part – and has launched in the under-served UK market.

Even more exciting for those of us cheering on the demand side of the equation are the stock-exchange listed vehicles currently available for the first time.  We have GBTC (Bitcoin Investment Trust) in the US and XBT (Bitcoin Tracker One) in Sweden … with more to follow.  GBTC is a little odd in that newly created shares must be held for 12 months, however we can assume that now it is listed it continues to grow in size.  More obviously beneficial to the quest for equilibrium is the Swedish XBT exchange traded note.  Since launch, volume has averaged >500BTC per day … as it is so new, one can assume that these are pretty much all buy orders.

So, being really pessimistic, these new developments together look to have absorbed around 20% of the supply of new bitcoins.  That is a significant change in just a couple of months.  If you were very optimistic you may feel that, at least for now, they account for the acquisition of ~50% of all new supply.

We do not know the magnitude of the overhang of supply (e.g. from miners who have hoarded coins and seek to sell them). However, I expect that if this level of demand were maintained for just a couple of months then the price will have to move upwards.

One thing is for sure, ETFs and ETNs nearly always grow over time (so much so that many believe they pose systemic risk to equity/bond markets). Traders can control the price of Bitcoin, but only temporarily if moving against fundamentals.  It is entirely possible that we have already passed equilibrium but a supply crunch has not happened yet.

Cyber crime

Why Bitcoin’s Illicit Image is Temporary

Until fairly recently, most media attention on Bitcoin has centered around its use on the Dark Web, thefts/hacking/blackmail and generally painted a picture that it is somehow in itself illicit and ‘dirty money’.  Many well-educated people still believe those interested in Bitcoin must be involved in something of questionable morality.

Last week I was in a meeting with two developers discussing smartphone/laptop/camera recycling sites. Both individuals are technically capable and know what Bitcoin is … one even mined Litecoin back when it was profitable.  When I suggested creating a site in the UK to pay people Bitcoin for their recycled devices, the reply was that customers interested in receiving Bitcoin instead of Fiat currency were probably ‘the wrong type of customer’ and that we’d likely get a lot of stolen devices sent in.

This meeting roughly coincided with the publication of an article on Coindesk where Alasdair Rambaud, SVP for Cardinal Commerce said that “Everyone thinks Bitcoin is the currency of criminals“.

Cyber crime

It is pretty obvious that Bitcoin’s image problem is real among the mainstream but early adopters do not need to feel ashamed. Illicit use of new technology is pretty standard throughout history as criminals are often the most motivated to try new technology that may benefit them. Some examples:

Gangsters would buy the best weapons, the fastest cars, etc. to rob banks and/or escape law enforcement.

Criminals would use the first telegraphs / telephones to obtain information more quickly, enabling them to front-run, defraud, tip off, etc..

Banks have been used to launder money since they were first created.

Pagers only seemed to catch on with doctors and drug-dealers. Having more than one mobile phone was also once associated with drug dealing. The use of ‘burner’ phones is still assumed to be motivated by something illicit.

The first software enabling credit cards to be taken securely over the Internet was made for porn sites. For a significant period of the Internet’s history, the overwhelming majority of eCommerce was porn-related. Not illegal, but some view it as of questionable morality.

The Internet created a whole new genre of ‘cyber crime’. Spam and viruses threatened to make e-mail less useful/desirable. Terrorists promote themselves on Twitter and Facebook.

None of the above resulted in a technology failing to become more mainstream. Perception of Bitcoin will change with time and growth in mainstream use. As law enforcement agencies become more savvy with the blockchain, criminals may start to avoid using Bitcoin and move to other more secretive cryptocurrencies … or simply go back to using cash, diamonds, weapons, etc. as their currency of choice!

One Less Customer for Western Union / Moneygram / etc.

Yesterday I decided to see how easy it would be to convince an EU citizen with family in the Philippines that she should no longer be using Western Union / MoneyGram or even smaller companies like Sigue or Ria to remit money to her brother.

Many people won’t have heard of Sigue or Ria. They are more reasonably priced (around 1% transfer cost + margin on the currency exchange for larger amounts >€500) but they also require her to turn up in person, fill out the forms, bring cash, provide ID, etc. … every time!  This family are happy to go to the trouble of shopping around as every Peso that arrives matters a lot.

As an experiment, I sent a small amount of Bitcoin to her e-mail address via Coinbase. I then told her about Coins.ph and asked her to try sending some Philippine Pesos to her brother as quickly and cheaply as possible.

western-union-moneygram-bitcoin

Within a few minutes, she had registered with Coinbase and Coins.ph, moved the Bitcoin across and arranged for about $30 worth of Pesos to be sent directly to her brother’s bank account the next day.  In reality nearly all remittances to the Philippines from Europe are next-day due to the time difference.  Many companies take two days to send funds across.

Using Coinbase and Coins.ph for small remittances is something none of the traditional services available can compete with.  They are roughly equivalent with Sigue and Ria for larger amounts, but so much more convenient (everything can be done from home/office, setup is done just once, etc.).

No more saving up a large amount to send to the Philippines simply to minimise fees.  No more hunting around for the best deal because they are constantly changing.  No more form filling each and every time.

“Tell everyone”, I said.  “Absolutely!”, she replied.

What is 21 Inc Developing?

21 Inc (www.21.co) continues to be in stealth mode, despite its record breaking $116million in financing which makes it the best-funded Bitcoin startup we know about. The most detailed explanation of what they are working on came from 21’s co-founder Balaji Srinivasan who stated they will build the equivalent of “56-KB Internet modems, international fiber cables, and wireless Internet towers” which took the Internet mainstream.

Many people have speculated what this means, using 21 Inc’s recruitment adverts as a guide.  Positions include ASIC designer, PCB designer, Datacenter operations engineer, among others.

Clearly 21 Inc will be engaged in some pretty large-scale Bitcoin mining (one job description states there will be day-to-day operation of 10,000+ server installations).  However, this is doesn’t add much in terms of mainstream adoption, so why? One answer could be that they’ve found a way to be more profitable than most miners.  More likely, in my opinion, is that they want to become/create ‘trusted nodes’ within the Bitcoin mining network permitting merchants & machines near-instant confidence that their transactions will be 100% confirmed.  This is something of a missing piece given the 10-minute average block confirmation time, although several parties are working on different solutions.  If this is the case, 21 Inc may be happy to mine at break even, profiting from adoption instead.

There has been speculation around a ‘hardware wallet’ given Qualcomm’s strategic investment in the company.  Certainly a competitor to Apple’s “secure element” would tick all the right boxes.  It would enable better security for the mainstream and non-Apple majority, ensuring any private keys were kept disconnected from the Internet even on smartphones or tablets.  Coming to a Qualcomm mobile chipset sometime soon?  I believe so.  One job advert does refer to “tiny embedded devices”.  Secure elements of some sort would also be necessary for machine-to-machine transactions … essentially allowing devices to carry around a signature/key without knowing what it was or being able to be hacked.

It follows, then, that 21 Inc would develop a software wallet to use their own secure hardware element and perhaps broadcast transactions to their trusted nodes first.  Merchants might pay a little more or simply prefer access to 21’s trusted network? Certainly machines transacting would need instant confirmations.  If I am right about the above, then merchant solutions (e.g. PoS) will be on their roadmap as well.

That is an ambitious programme of products and services, but somewhat distinct from the other well-funded Bitcoin startups which are already grabbing market share in the spheres of centralised cloud-based wallets, online merchant processing, etc..  Many Bitcoin purists may hate the idea of a network of trusted nodes within the ecosystem, however it may be a commercial necessary.  A vendor is unlikely to allow someone to walk out of their shop with a $1000 laptop without (near) certainty that they’ve been paid!

Looking forward to 21’s future announcements!

B-HlwKQIIAAUfdY

If I Have Seen Further …

“If I have seen further, it is by standing on the shoulders of giants” – Isaac Newton B-HlwKQIIAAUfdY

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