);
Bitcoin valuation (2) and scarcity

Bitcoin valuation (2) and scarcity

Bitcoin valuation (2) and scarcity

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The true intrinsic value of most of crypto currencies is uneasy to determine, including for Bitcoin (for which the number of ‘units’ to be created is perfectly known) and the speculative value is essential for explaining the price formation. We are analyzing today the concept of scarcity as an ‘objective’ approach for the  valuation of  Bitcoin.   

Looking at the 3 classical functions of a currency   (unit of account, medium of payments and value storage ) :

1-  Bitcoin is a unit of exchange as it can be used to measure  the value of a good.

2-  Bitcoin is also used as a medium of payment to exchange value.

3-  Bitcoin is a store of value, thanks to its technology  and advanced cryptography that allow  digital storing. The limited number of bitcoins to be created  is a mechanism that makes Bitcoin an asset comparable to precious metals in a digital form.

However, Bitcoin is not officially listed and is not regulated. Lastly and thanks to the  blockchain, Bitcoin is managed in a decentralized environment under a permanent consensus of its users  while fiat currencies are under the control and the centralization of central banks. Then, the  nature of Bitcoin and the commonly used fiat currencies is radically different. 

In the first article dedicated to the valuation of Bitcoin, we have seen the concept of valuation based on the Network Value. Having said that, it seems that Bitcoin price is reasonable given a network using success. Let see now how to analyse Bitcoin on the basis of the scarcity concept.

Scarcity value ( safe haven)  

To believe that resources on earth are rare is a misunderstanding about scarcity  as a key concept in economy. In the humanity history, we never missed any commodity or resource and resources prices stay  almost ever below their historical prices, thanks to technological progress productivity. The only blatant scarcity so far, is the needed time  that we have to exploit natural resources, manufacture goods and services, etc…  The dilemma that we have to face is how to store for the future the economic value that we are creating today. While today’s modern economies  have created ‘keynesian’ central banks that claim fighting inflation while they are gradually (or even quickly) deteriorating the intrinsic value of their currencies, they have also quit Gold as a standard (US dollar in 1971). Thanks to its physical characteristics and scarcity, Gold has always been a State’s  structural imbalances last resort as currency policies have always finally been inflationist

With Bitcoin, for the first time, we are using  a commodity with a limited supply. Whatever is the number of users or whatever is the  network frequency, we will never have more than 21 million available bitcoins (see our previous article about the ‘halving’and the mining ).As Nassim Nicholas Taleb, author of ‘Black Swan’, has written  « Bitcoin has no owners and  no authority can decide for him. Bitcoin is owned  by the community, their users. Bitcoin credibility is confirmed  now by a multiyear track record, enough time to be taken seriously…Its existence is enough to constitute an insurance policy that reminds  to the State that it didn’t own the monopoly of the currency hence forth, the currency being the last thing that the’ establishment’ controls. For all of us, it is an insurance  policy against an ‘orwellian’ future.. »  

Bitcoin price in USD since 2013

Cours du bitcoin depuis 2013

Bitcoin price and equivalence to the dollar money base

Given  those elements,  we can define the hardness of a currency  (meaning that is hard to increase its supply , instead of an ‘easy’  currency , characterized by  an elastic supply). We can look this through 2 criterias :

1) The  stock :  it is the existing amount of all that has been produced  less all that has been consumed or destroyed (annually). It is a measure of abundance.

2) The flow  which represents   the additional production over the coming  year.

A  weak  stock to flow ratio means  an easy currency  and a high stock to flow  ratio means ‘hard currency’. For instance,  Bitcoin will reach  a stock to flow ratio higher  than the stock to flow ratio of gold in 2022 and will be twice as high in 2025. In 2140, there won’t be any additional supply  of bitcoins, so the stock to flow ratio will  become infinite. This will be the first time for a commodity.

But how to  valuate Bitcoin  as a scarcity value  ?

That refers   to the major central bank currency  (for more than 90 years), the US dollar which is the first reserve and trade currency,  we can proceed to the calculation of equalizing the dollar money base to Bitcoin, taking the assumption of a changing ‘currency standard’.

This calculation has been precisely done in 2018 by UBS research  department for a specific study. On the basis of a US dollar monetary base of roughly  3800 billion dollars, the price of  Bitcoin equalizing the US money base should reach  USD 213 000 ! Furthermore, if the reference shifts from the US dollar money base to the whole aggregated global money  bases (more than USD 25 trillions),Bitcoin should be priced above USD 1 400 000 USD  ! 

Global money  creation(USD) / Number of bitcoins

Global money  base (billion of USD)

On the basis of the respective evolutions of all the aggregated  money bases since the creation of Bitcoin (2009) compared to the cumulative bitcoins creation,  the respective increases are favorable to Bitcoin price (let remind that the Bitcoin market capitalization of USD 150 billion is a very weak number compared to the  USD25 trillion of the global money base –see charts) .From now, the new Bitcoin supply will grow very slowly while accommodative central bank monetary policies are increasing very fast  the fiat supply. Then, it is clear to see the difference between ‘easy currency ‘ (inflationary) and ‘hard currency’ (deflationary) .

Even if we consider that the Bitcoin weight stays at an equal proportion of its current weight of the global money bases  (only 1%), a quick calculation shows that the price should move into the spread of USD 10 000 / USD 17 500.

                             

The gap is widening between the governance of central bank currencies (unbridled  money creation and liquidity massive injection) and Bitcoin, a new major innovative  and conceptual technology as a decentralized currency with a limited supply. In the future, we should see an increasing ‘haven’ footprint of Bitcoin as a  storage of value. Traditional fiat currencies are going to coexist with Bitcoin and the coming new forms of digital stores of value and medium of payment. Moreover, the relevant old Gresham law saying that « bad money drives out good » will still apply.   

Face to this, as a store of value, Bitcoin is destined to a strong revaluation.

Bitcoin Capitalization since 2013

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

RFinancial markets and asset management

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

Decentralized Finance in motion

DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

Will the launch of Libra be postponed ?

Will the launch of Libra be postponed ?

Will the launch of Libra be postponed ?

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Libra : what is it ?

During the 2018 spring, Mark Zuckerberg, founder of Facebook, has announced the creation of a blockchain dedicated business. David Marcus, former President of  Paypal and former boss of Facebook Messenger, took the lead.

Beginning of 2019, Zuckerberg stress the importance of messenger payment as a strategic key trend for their services development. So, a new project started. Its target is to solve the existing issues of using crypto currencies, meaning being able to execute payments with  :

–  low transactions costs

–  high transactions volumes capacities

The goal of the  Facebook ‘Coin’  (Libra) is to being used by messengers apps Whatsapp and Messenger for on-line payments and money transfers. Libra is willing to offer a basic access to a stable coin to emerging countries where most of people are unbanked. Of course, the group is  also targeting clients synergies, thanks to the 2.3 billion messengers apps users (and Instagram users).

A payment functionality is already available on Messenger but this service have problems with the traditional banking players. With Libra, the process is supposed to work on real time and should replace  standard banking offer.

Backed by a basket of ‘fiat’ currencies, Libra is similar to a «Stable Coin»,( a mix of US dollar, Euro, Yen and British Pound),  Libra  relative value should be stable in some extent.  

In June 2019,  Zuckerberg has given more details about the project and has indicated  that Libra will be supported by a private blockchain for settling payments. Libra will be able to be acquired by any fiat currency and will be available to support on-line payments as available for any ‘hard’ shopping places. 

The currency will be issued by a Switzerland based foundation located in Geneva.

28 partners have been associated  to the project of which the main payment sector players as Mastercard, Visa, Paypal, Stripe and some other Internet and e-commerce  players as Uber, Lyft,  Spotify, Ebay, Vodafone, Booking , Iliad and some others.

 

Supporters and project partners :

At the launch, each of the 28 first partners  contributed by investing $10 million as an entrance ticket within the foundation.

Each member became therefore responsible for the currency governance and can run a ‘node’.

Due to several political pressures, especially coming from  authorities that appear panic by this new competing currency and its universal adoption, 6 of the initial partners (especially the big global payment players) decide to withdraw from Libra in october 2019.

There are Paypal and  Mastercard, Visa, Stripe, Ebay , Booking and Mercado Pago  

 

What are the issues ?

The market of money transfers and messenger payments is buoyant. Indeed, in numerous emerging markets, it is very difficult for many people to open a standard bank account  or to do on-line shopping. The coming Libra as a new medium of payment is a new way to propose access to a bank account to citizens who were unbaked up to now. 

China is clearly taking the lead on this new issue. Payments by messengers work well for a while through  WeChat of Tencent or Alibaba’s Alipay. The mobile app  Wechat allows internet users to chat on line,to buy public transport tickets or cabs tickets and to do shopping. But unlike to the Libra solution, WeChat is under the control of the Chinese Government.

Even if Libra is not supposed  to be a ‘store of value’ but instead to become a global medium of payment with low fees,  it is easy to understand the rising strong competition of Libra as a new tool that will be soon  used by millions of people. Facing many official criticisms triggered by this project, it seems quite obvious that Libra would be a great success.  The main criticisms are the followings :

 

– Respect for Privacy : Big Internet players as Facebook are charged on the subject  of respect for privacy. Libra, as a new medium of payment dedicated to Facebook would increase risks on respect for privacy by monetizing personal datas.

– Specific risk linked to the launch of a new global use ‘stable coin’: Systemic impact ?

The needed currencies counterparts  for managing Libra could create a destabilizing impact on financial markets Libra foundation will be transformed as a central banker. Therefore, participants will be responsible for a monetary supply that will be originated by transactions on Facebook messengers and for which the Calibra* wallet will be directly integrated. But all  those operations are not under any States control.  

– Regulation, money flows and taxation  : some officials (J.Dimon CEO of JP Morgan and  François Villeroy de Galhau, governor of Banque de France for instance)  have been recently involved in the debate and said about Libra that they fear a lack of transparency and underline the issues of money laundering, terrorism financing and generalization of illegal activities And it is true that the Facebook’s crypto will be easily used through your smartphone.  

 Endanger the States sovereingty  : the recent statement of Bruno Le Maire, French Ministry of economy, is explicit enough, stressing Libra project « With the Libra project, money sovereingty of the States is involved. Under such conditions, we cannot allow the development of Libra in the European soil ».

Last news

As mentioned, the latest official statements have been really bitter and clearly against the Libra project.

In the US, the Congress Financial services Committee Chairwoman  asked for the project suspension until the Congress and regulators  scrutinize it and call the projects initiators to come for Congress hearings.

Face to this rejection statements (as the money sovereignty is endanger at the same time as ultra accommodative  monetary policies are in place and are questionable), more and more states are willing to create their own central bank digital currencies (CBDC).       But those cryptos will be obviously centralized and under the countries control.

In this hostile context, it is not surprizing  to note that the main payments sector players that were intially  Libra foundation partners have recenlty given up and withdrawn.  

Despite those defections, the Libra foundation has really been founded and a first meeting recently took place, by gathering players that are convinced by the project relevency and its future success. But official pressure is strenghtening. Zuckerberg is coming for hearing at the Financial Services Congress Committee october the  23th. Some partners are also fearing that investigations on Libra spread out to their other own businesses.   

Given those points, and while the network deployment has been initially planed for the first quarter of 2020,   Facebook has announced that the launch will be postponed and will take the needed time in order (and respect) to reply to all the questions asked by the regulators.  

To be followed

* Calibra is 100% Facebook subsidiary. Its app  will allow to couple a crypto wallet natively compatible to Facebook messengers, to organize transfers and payments and to buy products of the group’s partners.

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

Financial markets and asset management

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

Decentralized Finance in motion

DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

Bitcoin pricing (1) and network value

Bitcoin pricing (1) and network value

Bitcoin pricing (1) and network value

This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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The true intrinsic value of most of crypto currencies is uneasy to determine, including for Bitcoin for which the number of ‘units’ to be created is totally transparent and perfectly known (as it is planed by the protocol) and the speculative value is essential for explaining the price formation. Therefore we are going to devote 2 successive articles to ask the principles for trying to get a more ‘objective’  pricing for Bitcoin.   

Bitcoin has created a new business model that is clearly different from the others (traditional  ones). Indeed, no used classical concepts for valuating Bitcoin can’t be applied. Before starting to talk about the first valuation basic theory for Bitcoin, let see why Bitcoin can be  considered as a currency.

Looking at the 3 classical functions of a currency   (unit of account, medium of payments and value storage ) :

1-  Bitcoin is a unit of account as it can be used to measure  the value of a good.

2-  Bitcoin is also used as a medium of payment to exchange value. This is clearly what is occurring between the network’s members during transactions...

3-  Bitcoin is a store of value, thanks to its technology  and advanced cryptography that allow  digital storing. The limited number of bitcoins to be created  is a mechanism that makes Bitcoin an asset comparable to precious metals in a digital form.

 

However, Bitcoin is not officially listed and is not regulated. Lastly and thanks to the  blockchain, Bitcoin is managed in a decentralized environment under a permanent consensus of its users  while fiat currencies are under the control and the centralization of central banks. Then, the  nature of Bitcoin and the commonly used fiat currencies is radically different. 

It is time now to examine the most  shared theoritical basis for assessing Bitcoin. What it is called the network value.

 

Network valuations

Let’s  take the assumption, based on the observation, that  the Bitcoin network is getting an effective service to its members. It’s about the decentralized and autonomous network, built around all computers that have uploaded the protocol.  What is the main goal for this network ?

It is to solve the specific issue of transfering  value on Internet  (on this basis, Bitcoin is only considered as a medium of payment).

This is one of the major bring of the  blockchain technology. In contrary to the traditional money transfers processes that need a trusted third party, the Bitcoin decentralized  network and the protocol strength allow perfect and safety ‘peer to peer’ trades.

Therefore, it is this network value that is pushed forward  for trying to estimate the current and future values of Bitcoin.

NVT ratio (Network Value to Transaction)

In this formula,  

The network value is approximated by the Bitcoin  Market Capitalization (equivalent to the number of outstanding  Bitcoins (supply) multiplied by the last spot price) and

The daily  on-chain transactions value  is equivalent  to the traded volumes over the last 24hours* 

This means that the NVT ratio relies on the idea  that we can use the network floating money as a proxy for valuating the network. Given the daily transaction value (traded volumes over the last 24h) and the Bitcoin price volatility, the NVT ratio can be estimated by a moving average calculation of the two parameters (smoothing the datas) . So this can be written as follows : .

NVT= Daily NV/90MA DTV

or

NVT=Daily average capitalization / DTV Moving average (over 90 days)

As the « data wizard »  Willy Woo ** said, (Willy Woo has initiated the concept) , « When   Bitcoin`s NVT is high, it indicates that its network valuation is outstripping the value being transmitted on its payment network, this can happen when the network is in high growth and investors are valuing it as  a high return investment, or alternatively when the price is in an unsustainable bubble».

Briefly said, higher is the ratio and higher Bitcoin price is speculative, meaning  that a market correction will take place soon, and vice versa.

Chart of the Bitcoin spot price  (yellow)  and  NVT ratio (brown) since 2009

 NVT line indicates an under/over estimation  relative ( comparison with the 2 dotted lines) to the network value / Daily transactions value

 

 btcnvtratio

 

Going more deeply in the concept of  Network Value, Robet Metcalfe has defined  the NVT ratio on the basis of the  ‘ METCALFE’ law.

This is a theoritical and empirical  law that defines the network effect

The law defines the network utility as proportional to the square number of users  (under conditions of homogeneity of the network nodes).

To valuate a network, this is defined straightforward  as follows :

NV (network value)= C*n^2             

(n being the network nodes number)

Following the rule of  [(n*(n-1))/2] as the number of relationships within a network with n nodes

n=2 => 1 relation

n=5 => 10 relations

n=12  => 66 relations etc….

So, the relative value of the network, calculated by the Metcalfe formula (NVM) equals the logarithmic division of the current network value and the Metcalfe network value , and is :

NVM=logNV(current)-logNV(Metcalfe) or = log(NVcurrent/NVMetcalfe)

And corresponds to a value between  -1 et +1.

Metcalfe law simply says  that higher is the number of a network users and higher the network value is, on the basis of a quadratic growth function

Criticizing but without challenging  the strong growth function of a network value by Metcalfe , mathematician Andrew Odlyzko puts in doubt the quadratic growth of a network utility , as the  Metcalfe definition. He thinks that the increase of the value is not so strong, involving that estimates of numerous networks are overestimating their values

For him, the growth function is a multiple of  n*(logn)  but not a multiple of  n^ 2

As a conclusion, Bitcoin valuation based on networks utility  seems to be a key approach, knowing that, on the one hand, Metcalfe law probably gives over estimates but on the other that  Odlysko function gives under estimates

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

Financial markets and asset management

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

Decentralized Finance in motion

DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

The coming Bitcoin ‘halving’

The coming Bitcoin ‘halving’

The coming Bitcoin ‘halving’

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What is a ‘halving’ ?

In the  crypto currency world,  mining is the process of  solving,, checking and recording  transactions in order to add a block and create  a new unit of the crypto coin. This type of blockchain   consensus mechanism is named ‘Proof Of Work’ (POW). This   processing operation is awarded and it is rewarding the miner who is validating (solving  and adding ) the block during a transaction. 

Reading   the original    ‘White Paper’ published  in 2009 by the Bitcoin’s  father, Satoshi Nakamoto, it is  mentioned that the process of bitcoins  creation is transparent and pre determined   at a certain growth that is defined by the protocol   So, the number of outstanding bitcoins to be created is limited  to 21 million (or more precisely to 20 999 999,9769). Following the mining of one block, 50 bitcoins have been generated  roughly every 10 minutes during the first 4 years of the crypto currency’s life , then, this number shifted to 25 BTC at November 28,  2012 and to 12,5 BTC since July 9, 2016. Every 210 000 blocks (roughly every 4 years) the reward for validating a new block is therefore lowering  and come down progressively ( see charts).

The Bitcoin Halving  or ‘Block Reward Halving’  is therefore the timing when the minor’s reward is divided by two.  It is also the event whereby the Bitcoin inflation* is instantly reduced  by 50%.  

The coming Bitcoin halving on the network

 

As defined by the protocol,  the next Bitcoin’s halving will take place and run automatically on the network, without any  stop. All the following blocks will be mined as the same manner as today, but the only difference after the coming halving is that miners involved in validating new blocks will be rewarded by only 6,25 BTC per block versus 12.5 today.

Next Bitcoin halving will take place in May 2020 (presumably the 27th)

 

What will be the consequences and do we have to expect a Bitcoin price increase before or during the halving ?

Like any asset  freely traded on the market, Bitcoin price is depending on Supply and Demand. As the  growth rate of new bitcoins creation is defined by the algorithm, known to all, only the demand is unpredictable. But the effects of this such mechanism will have many chances to be anticipated by the halving date, that is to say in the coming weeks and months. Direct effects of the halving should be reflected in the price and are two fold  

 

1/  anticipation effect 

2/  scarcity effect that comes from the crypto currency’s decreasing supply mechanism  

We have to look back now how did it go during the last two ‘halving’ :

 

Back looking previous Bitcoin halving 

 

During the first halving, November28,  2012, Bitcoin price realized a +1.7% increase that can be considered as negligible. However, during  the previous months (increase of 500% in 12 months) and the following,, the Bitcoin price has regularly climbed up to reach the well know top of  2013 (an increase from $13 to $260 over only 4 months and about +1700% in two year time !)

 

Before the second Bitcoin halving,  July 9, 2016,Bitcoin regularly increased  in ten months (+200%) but decreased just after the halving,  before seeing finally increase restarted one month later. In 2016, Bitcoin price  moved from $260€ to $860, and, in a 2 year time following the halving, the price trend was  strongly bullish (closed to 2900% !)

 

The third halving : what should we expect ?

Looking at the experiences of the  two previous halving, and at the market theory, we should expect a Bitcoin price increase that might occur  but rather during the phase before the event. Indeed,

Bitcoin decreasing  inflation* (‘monetary’ bitcoins creation  process) will have already been anticipated  by investors and will have already been priced by the market therefore.   

A substantial volatility  could come just before and during  the halving as Bitcoin is not really often  under the spotlight of major events (unlike with some crypto currencies or tokens of ‘early stages’ stories  or new developing projects) Halving is a major event for Bitcoin.

Conclusion 

– Based on the two latest halving  experiences and on the classical market anticipation process, especially on ‘pre-announced’ events , it seems obvious that a ‘pre-halving’  bull trend phenomenon be priced progressively (or maybe quickly ) in the Bitcoin within the ‘end of 2019 to May 2020’ period (May is the month  during when this third halving occurs). That being said, following a big plunge of the Bitcoin price as for all crypto currencies in 2018 (-70% to -80%),  we don’t have to forget that BTC price has already increased by more than 140% in 2019 (the last is around $9000 at the time of writing this article)   

Many people consider Bitcoin as similar as a ‘digital precious metal ‘  because of its ‘scarcity’ characteristic. In both cases (Bitcoin and precious metal) ,  the limited outstanding monetary amount give them a ‘haven investment’ print that is very useful  to fight against the inevitable intrinsic value debasement of sovereign currencies . Those currencies (or fiats) are  however considered as ‘anchor’ values. –  

   Over a longer term and  given the intrinsic deflationist conception of  the crypto currency Bitcoin, we can ask the question about the apparent (mathematically) huge upside value potential.  We are now entering in the phase of low growth pace of new bitcoins creation (18 million out of the 21 million have already been mined  and at the next halving, more than 89% of the total bitcoins will have been created), but it will be in 2140 that the last remaining rewarded block  should be mined, with a reward of only one satoshi (0,00000001 BTC). But who, as a Bitcoin miner, would agree to allocate its computer power and spend  a large quantity of electricity consumption for a reward of only 1 satoshi ? Following the point when the last remaining block will have been halved, miners will not be rewarded anymore. A that time, they will only earn bitcoins through transactions costs. It means that transactions costs will be going to play a greater role. One of the other answer will also hold in the use of  Bitcoin in the future , but on top of that, the answer is also in the level of the price that Bitcoin will have reached , price that will be able to compensate the lack of reward. . 

 

  • * Bitcoin inflation  = 21 Million x Blocks mined  / Existing Money (MM)

 

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

Financial markets and asset management

Real assets tokenization : use case in the real estate

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

Decentralized Finance in motion

DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

Cryptocurrencies exchange platforms

Cryptocurrencies exchange platforms

Cryptocurrencies exchange platforms

This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

Difficulty of the article:

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What are they for ?

A cryptocurrency exchange platform  allows trading crypto currencies , buying or selling them,  exchanging them to traditional fiat currencies. Concretely, an exchange platform is an internet web site on which you can buy or sell  Bitcoin, altcoins (crypto currencies) or digital tokens . Very often, only Bitcoin and Ethereum are available through fiat currencies transactions. However, each platform decides its own  use policy . Thereby, one should make the choice among a great number of existing platforms (we are counting 175 platforms of which Coinbase and Binance for the first well known).

Positive points :

-Simplicity : Face to  decentralization that allows ‘peer to peer’ transfers in a total secured  operation, access to crypto currencies through exchanges platforms simplifies transactions and allows users to benefit from many functionalities to change or transfer digital assets

-Use and mobility :  It is possible to use opened services offered by the platforms whenever you want and wherever you are.  At the smartphone ‘era’, most of the trading platforms can offer an Android or iOS app that allows using  all services for users that make trips or move and allows to manage anywhere and anytime.

-A wide range of services : Even if users of those platforms need technical skills, most of them  are trying to enhance functionalities and friendly using. However, improvements should be realized  to facilitate platforms using and trading digital assets to a larger audience.    

Negative points:

– Recentralization : The paradox is that the platforms are re-introducing  centralization within the decentralized ‘blockchain world’.

-Security : In addition, one of the major blockchain strength  is about the transactions security that is existing thanks to the cryptography. By recentralizing transactions on the platforms, the risk is therefore increased. Because, like the with credit cards systems, the crypto platforms are sometimes the targets of cybercriminals, and the least secured are victims of hackers, and therefore cryptocurrencies owned by clients users stolen Following a big hacking,  History will especially remember hundreds  of thousands bitcoins that disappeared on the Japanese platform  MtGox.

– Regulation,  official agreements : Regulations are different, depending on the countries  Between  30% to 50% of the  platforms hold a business license, according to a Cambridge University study and quoted by the Landau report.78% of the  platforms for which the headquarters are located in North America hold an official business license. 85% of those based in Asia- and Pacific Rim do not hold any business license. In Europe, 47% hold a license and  43% in Latam. Since the launch of Bitcoin in 2009, 45% of the web sites have ceased running businesses, and it is probably the consequence of hacking for 50% of them. For the smallest platforms, it is more probably due to too low volumes.  

How to choose them ?

Even if most of the trading market places share the same characteristics, each of them get specificities. You can find here below few key points to make your own choice. 

Fees

For a large majority of platforms, transactions costs are degressive in proportion to volumes (0,30 % for a small order , 0,10% or down to  0.01% for a very large order). Inquire and look for information about custody costs and fees on withdrawals in euros. Purchases with credit cards are clearly going faster but are  the most expensive too.

 

Privacy and regulation

By nature, Bitcoin is an anonymous digital currency and users are frequently willing not to share their private  datas on Internet (privacy). But due to reinforced regulations for the fight against the financing of illegal activities,  platforms shall ask users for personal informations , in order to be authorized to trade (processes  KYC or ‘Know Your Customer’ and AML or ‘Anti Money Laundering’) An ID copy  (with a photo) is often necessary. Different layers of  control are possible and some platforms are more flexible ( some of them even allow to trade anonymously still).

 Security

Cold storage : It is a use that consists to store cryptos  ‘off line’ , that is to say an off-line physical device (ext hard drive ,USB key).It is a  favored solution by many platforms that aim to defend oneself against hackers. To minimize risks, managers of the platforms   deploy crypto currencies cold storage solutions(traditional hard drive disk). Otherwise, work is in progress to find out or enhance others and more sophisticated security solutions.

‘On line’ storage or  ‘hot storage’

– SSL certification (Secure Socket Layer) is a good quality security solution. It is about a securisation   protocol between computers on the network.

– Two factors authentification  (2FA) preserves  clients to an unauthorized  access. This method needs two sub-methods for validating and authorizing access to an ‘on line’ account.

Usually, 2FA process is the following :

1/  a user  known information  ( password)

2/ A user owned   element (often as a digital code generated on the mobile device)

Otherwise, the biggest platforms are refunding clients that are ‘on-line’ attacked and victims of hacking. Such  cases happened recently

 

Transactions volume

The volume is something that can be used to assess confidence and success  of a platform. Volume is correlated to the number of available crypto currencies for the trading A large volume is favorable for trading in good conditions.

 

Proposed  pair trades

BTC/USD  is the most traded pair  but some trading platforms  also offer other trading possibilities from Bitcoin to Fiat. As altcoins are becoming more and more popular, many platforms offer the possibility  to trade minor ‘alternative coins’. However, even in this case, most of the time, the trades of the altcoins are priced in bitcoins, so users cannot deal purchases or disposals directly priced in US dollar for example (or in any other fiat) .

Trading with leverage

It is also possible to trade futures or options, but it is always by paying additional cost. Margin trading means borrowing  money to increase exposure (leverage effect). This leverage allows high profit after closing the trade, but also means a higher risk for the user. The possible leverage can be increased up to 100x and even more ! This is unreasonable.   

 

Some concrete elements  

To conclude, it worth to mention comparative elements that  follow a recent analysis combined to a ranking of the best platforms, a study produced by Cryptocompare  (a UK crypto datas provider).

The study has been realized on the basis of traditional assessment parameters (total  trading volumes, fees, …) and also includes some other criterias as ‘security level’, past  hacking events (if any), clients privacy data informations leaks, etc…

Please find below the Top5 platforms ranking as you can find within the mentioned web site :

(https://www.cryptocompare.com/external/research/exchange-ranking/)

  1.     GEMINI
  2.     ITBIT    
  3.     COINBASE
  4.     KRAKEN
  5.     BITSTAMP

Whatever the quality of that type of ranking is (for which we do not comment and just report the output), depending on their needs, users should make their own opinion by themselves .

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

Financial markets and asset management

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Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

Decentralized Finance in motion

DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.

Bitcoin mining ban in China

Bitcoin mining ban in China

Bitcoin mining ban in China

This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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Let see first how regulations on the use of crypto assets have recently evolved in China before giving you few comments about the specific issue of the Bitcoin mining activity in this country. Regularly, rumors of ban come up , but at the same time, we know that China will become to be the first major country to launch its own digital currency in 2020.

Bitcoin legal status all over the world

The legal status of Bitcoin and related crypto assets varies substantially from state to state regulations and is even still undefined in many of them. While some states have explicitly allowed its use and trade as an asset, others have restricted or banned it.

 

Légalité du Bitcoin dans le monde

Green : Legal to use Bitcoin
Red : Full or partial prohibition
Purple (Russia) : Specific legal restrictions but Bitcoin is not prohibited explicitly
Yellow (of which China and India): Legal  restrictions on Bitcoin use

The case in China : regulation changes 

In China , financial institutions are not officially allowed to facilitate bitcoin transactions. Regulation prohibits financial firms holding or trading cryptocurrencies.

 On 5 December 2013, People’s Bank of China (PBOC) made its first step in regulating bitcoin by prohibiting financial institutions from handling bitcoin transactions.

 On 1 April 2014 PBOC ordered commercial banks to close bitcoin trading accounts.

In September 2017, cryptocurrency   trading exchanges were banned by regulation with 173 platforms closed down in less than 9 months. 

In early 2018 the PBOC announced that  the State Administration of Foreign Exchange would crack down or ban  on bitcoin mining. Then , many bitcoin mines based in China had stopped operating  but this decision was not finally approved.

Mining ban in China

For many people Bitcoin mining is synonymous with China, as we find out there the largest mining pools but   also the predominant manufacturers of ASIC mining equipment. We estimate the world mining share realized in China at 74%.  But the NDRC (National Development and Reform Commission),a Chinese agency which is responsible for setting domestic macroeconomic policy and follow up, has been in charge of studying and planning the ban of this activity. But in fact, up until now, it has never been finally decided as many different players together involved were not yet consulted   and as this decision has not been validated by the executive politics power yet.  

Reasons  to justify the idea of Bitcoin mining ban are several fold, of which :

-Environmental   unfriendly aspects because mining is energy wasteful and rejects CO2. However, it worth to add that an increasing share of energy used for mining is coming from renewable sources. 

-In addition, because of current regulations and  laws as Bitcoin does not comply with all the existing financial rules.

But it is likely that the real  reasons are related to the uncontrollable an pseudonymous Bitcoin using, in a period   during when private saving is searching for ‘safe haven’ and because private money cannot flow out of the country (household savings are blocked locally in China). Together, the political power is looking for a greater   credibility of the Yuan (it will also likely be coming from the launch of the crypto sovereign currency next year) .Meanwhile, the banking sector pressure is strong against Bitcoin, and even if Bitcoin is not widely adopted,  the potential is huge and its use would greatly reduce the power of the banks.     

 

How a removal of China mining could affect security  ?

What would be the consequences of such a removal from China and if all that mining activity moves to other countries in the world where costs are also weak (low energy consumption as in Canada, Russia or Iceland) ? It means that market share of miners out of China would rise and limit the large mining concentration in China. This would not be a bad news in term of security. But if the miners don’t find any countries where to transfer their businesses and cannot   sell the equipment , the available mining power would suddenly plunge and would slow down the global transactions validation process. Therefore, this would trigger big delays on the network and transactions commissions would increase sharply over the following days. 

 

What would be the effect on ASIC (‘Application Specific Integrated Circuit’) ?

Bitmain and Canaan Inc (the two  largest producers of ASIC mining gear.in China) and all the other players would be the most affected. While it appears that the ban only affects the usage of mining gear, not the manufacturing of it, the bottom line of these two companies will still be at risk. 

When Bitmain produces a new ASIC miner instead of selling it they use the cutting edge technology to mine Bitcoin themselves. This gives them a significant advantage over all the other miners. Through this method Bitmain can generate a significant revenue on their new ASIC miners and once the profits start to flag they can still sell these ASICS  equipment. If Bitcoin mining was banned in China, however, the large ASIC manufactures would no longer be able to do this (unless they set up mining operations in other countries) and they would lose profit because of it. With this scenario, it worth noting that tens of thousands of second hand ASIC miners would come onto the market at significantly reduced prices and benefits. 

 

What would be the impact on prices ?

1/ Some people are saying that it could increase the price of Bitcoin because  mining would become more expensive (needless to say that the cheap average price of electricity in China is the main reason for the plethora of Chinese miners) 

2/Second argument relies on the fact that lowering Chinese mining interference would strengthen confidence on Bitcoin and could help for a higher price. 


Conclusion   : Mining could be limited but not banned 

1.It seems clear that how Bitcoin and other crypto currencies are considered by Chinese officials is a double speech. : in the one hand, restrictions to use it, and on the other hand, an early advanced project to issue soon a sovereign Chinese  crypto currency (likely backed to Gold). But this digital currency will be totally controlled by the Government.. 

  1. About the mining activity, a potential ban in China would structurally modify its fundamentals. A large proportion of the mining in China is still very active, especially in some regions (they are still 30 000 machines that are not all legalized in the Sichuan region and that represent roughly 70% of the Chinese mining capacity). What NDRC did announce has worried many people, but reality is far different and it is not likely that this business will be proposed to be banned, and if yes, it is not likely that the Chinese power agrees such decision. If it is decided, miners will leave the country, and if they can’t , the network will however continue to run with security.

Not a ban but a   limited use, in addition to taxation that can be reduced (if miners use renewable energies) would be a more logical scenario 

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

    Decentralized Finance in motion

    DeFi or Decentralized Finance gives opportunities. Recently, few traders took the chance of using this new financial system by realizing winning arbitrages on substantial volumes through crypto ‘flash loans’.