);
Bitcoin valuation and production cost (3)

Bitcoin valuation and production cost (3)

Bitcoin valuation and production cost (3)

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After  having discussed about the Bitcoin pricing on the base of its Network value (article published  on 11/14/19)  and on the base of its ‘scarcity’ ( see article published on 11/21/19)-, let’s have a look now on an approach based on its production cost.

Bitcoin is based on the Proof of Work (PoW)

It’s necessary to remind that the proper functioning of the Bitcoin Blockchain requires the validation of transactions carried out on the network. These transactions are grouped into blocks where each added block is validated at regular intervals by ‘miners’ who should solve a kind of mathematical equation. The resolution of this mathematical problem is very computationally intensive. This consensus mechanism on which the Blockchain Bitcoin is based is called Proof-of-Work (PoW). The difficulty of the mathematical equation to solve for a block of transactions to be undermined is periodically readjusted. Nevertheless, this difficulty tends to increase constantly except during prolonged bear markets. It was the case in 2018, and at that precise moment, the difficulty decreased in front of the loss of financial interest of the miners for Bitcoin mining.

(see the chart below showing the difficulty of mining a new block on the Bitcoin)

The almost uninterrupted growth in the difficulty of mining Bitcoins inevitably leads to an arms race on the part of miners to obtain ever more computing power.

Chart showing the constant increase of the Hash Rate   

(Hashing : mathematic way to enable the security/ cryptographic process for mining Bitcoin)

In this way, miners maximize their chance of receiving  the reward  which is paying the miner who is successful in solving the encryption problem and who is validating the block of transactions. The reward  is currently 12.5 bitcoins but it will decrease to 6.25 bitcoins in May 2020 (read our article published on 10/31/2019 about the  coming Bitcoin Halving ). This division of the reward will make the creation of new Bitcoins even rarer. This scarcity will inexorably increase the price of Bitcoin but also increase competition between miners who will continue to try to have ever more computing power available.

The computational power of miners being obtained through the purchase of computer equipment specialized in Bitcoins mining. This type of famous equipment is called ASIC  (acronym for Application Specific Integrated Circuits).

Bitcoin mining induces  High Power consumption

 Cambridge Bitcoin Electricity Consumption Index

As mentioned, the process to validate a transaction’s block and create new bitcoins results in  very high power consumption. According to the Bitcoin electricity consumption index calculated and maintained by the Cambridge Centre for Alternative Finance (see the above chart), Bitcoin consumes 70 Terawatt-Hours per year to ensure the reliability and security of its network. This electricity consumption places the Bitcoin Blockchain just above Colombia, a country with a population of 48 million !.  

Bitcoin Mining simplified microeconomic model

A miner has an incentive to mine if, and only if, the total revenues generated  by the mining  activity on a given period exceeds  the total costs incurred by this activity.

But it also must be taken into account the potential  increase capacity of mining and it gives the following equation :

(1)      PBTC (Bitcoin price) >  A x Nm

Nm is the number of miners in the network

A is a constant number equivalent to the mining profitability equation (Revenues/Costs)

The equation (1) shows us that the price of a bitcoin is affected by the number of miners in the network. The price of a Bitcoin depends on the demand for bitcoin in a context of limited supply.   An increase of the Bitcoin price gives the miner a greater incentive to mine, which leads to a rise in the number of miners in the network. However , this increase cannot exceed the network profitability threshold  (PBTC /A) that  implies mining costs larger than revenues.

Therefore, it is clearly the price of Bitcoin the only factor that motivates  a player to mine and develop (or not) his activity. But the true economic reality is much more complex as the miners don’t all work  in the same conditions and do not have :

1/ identical computing power

2/ identical electricity cost

As said,  miners can also maximize their production by buying  more sophisticated hardware, forming large mining pools (mining farms) that combine their computing power, and by setting up business in countries with the cheapest electricity costs.

Mining cost in different countries

As the electricity cost is the key parameter  of the mining cost , let’s now have a look on the different electricity tariffs depending on regions and countries. Elite fixures  gives information on electricity prices to provide Bitcoin mining facilities all over the world (see the map and chart)

So, the miner ‘Holy grail’ is obviously based on cold weather countries (in order to refrigerate machines) and low electricity prices.

At looking more in details the numbers , we can see that :

South Korea  is the most expensive country to mine  Bitcoin (26170$), even if this country controls the majority of the capital invested in the Bitcoin industry at the same time

Venezuela is the cheapest country to mine with a ludicrous cost of 531$, thanks to State subsidies.

-In France, the cost level of 7930$ is in the average.

And for countries with favorable (cold weather) conditions as:

-the United States (at the world  ranking 41) the  average cost is 4758$

 –Russia and Iceland  have the respective costs of  4675$ and 4746$.

For China, the country that is bringing together the largest stake of the mining capacity, has an average cost of 3100$.But low cost Chinese miners can pay even less , a cost estimated  by JP Morgan at roughly 2400$  per bitcoin, helped by deals with power producers. These miners take the opportunity of direct electricity purchase agreements, like with  aluminium shelters that are looking for selling electricity excess production.

Conclusion

Even if the cost to produce a good or a service is not an absolute determinant for a minimal price of this good (or service), economical  rationality says that an equilibrium is found at a level where the production cost gives at least a break even, as a ‘floor’ price. All things and costs being equal, (electricity  prices and amortization of the hardware ASIC machines), a global mining cost average is around 6000$/7000$ and seems to constitute a minimal price for Bitcoin.

Below this price, supply would decrease (maybe except in China where the costs are much lower) , but based on this assumption, the reduced difficulty of mining would give a boost to new supply that would bring back an equilibrium later on.

On this base, and at the current price, Bitcoin is justifying its production cost (but not much more) This current cost is probably offering a floor level to Bitcoin today.

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’.

What is a Fork ? Can Bitcoin be endangered by a Fork ? Read for thought

What is a Fork ? Can Bitcoin be endangered by a Fork ? Read for thought

What is a Fork ? Can Bitcoin be endangered by a Fork ? Read for thought

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What is a Fork  ?

A fork is a divergence to the protocol from the previous version of the blockchain.  In a blockchain, forks are justified by the different stakeholders who should used common rules for validating blocks.

What is this for ?

-If you wish to launch your own crypto currency, a possible solution is to launch a « Hard Fork* » from an existing  blockchain.

– Otherwise,  a « Hard Fork » is often the only way to conciliate opposite opinions  within a blockchain community.

These forks may occur for several different   reasons that are :

Intentional

 

1/ Blockchain protocol rules changes .  The main  frequent reason is a deliberate change  of the source code to improve it or to make it evolve . In other words, if you want to change the rules of a protocol such as the maximum block size, update security rules, or create a new crypto asset from an old one, you must perform a fork to create a new branch.

2/ Splitting a blockchain in 2. It can happen that  a new block is generated by a rogue miner, then  the system reaches consensus that this block is not valid, and this ‘orphan block’ is very soon abandoned by the other miners.

Unintentional

3/ a situation during when 2 blocks at least get the same bloc number

Typology

There are two main types of  forks. Additionally, we can mention the “Codebase  Forks”. Let see what it means :  

Hard Fork

Hard forks are deliberate, and occur when there is a major difference of opinion within the community which has built and sustained a particular blockchain, and one (or both) of the camps decides to go their own way. The group that disagrees with the original protocol ‘forks’ off its own version of the blockchain and the members who believe in this fork upgrade their systems to work on this new blockchain, leaving the previous one. Nodes (miners) running the previous blockchain are not accepted by the new blockchain. Users who prefer the old version can keep their systems and nodes working on it. This will then create (1) two competing blockchains, or (2) all the nodes will consensually agree the new blockchain and accept to work with the new protocol.

Let’s look in more details and distinguish 3 different types of hard forks :

 

(1)  HF Contentious

Caused by disagreements in the community,   forming a new block chain. This usually involves major changes to the code.

 (2) -HF planned  : In this case , we have a scheduled upgrades to the network, giving users a chance to be  prepared. These forks typically involve abandoning the old chain.

To  these two cases, (3)  we can add the specific case of “Spin off coin”  that  is shared changes to  the code that create new coins (Bitcoin’s example with  Litecoin and key changes included reducing mining time from 10 minutes to 2.5 minutes, and increasing the coin supply from 21 million to 84 million.In fact, Litecoin and Bitcoin are running with the same mining programs following the code changes).

Therefore, one can imagine the  blockchain with forks as a tree, and the  successive hard forks that seem to create new branches.(see the map of Bitcoin forks at the end of the article).   

Soft Fork

Like hard forks, they involve two version of a blockchain. However, unlike hard forks, users can keep running the old version after a soft fork, and still be part of the same network as the users who have upgraded to the new version.

Original blockchain in blue, and the forked version  in red. Both can exist simultaneously.

Codebase Forks

Codebase fork is a software development term. When a developer works on the source code of an application (it could be blockchain-based, or another software product) to develop (or create) a distinct and separate version of the software, the new version is called a codebase fork.

It is ultimately the decision of the network’s users whether or not they want to upgrade. Developers cannot force changes. They can only suggest changes and users decide whether to adopt them or not. On the blockchain, too, the fate of codebase forks is in the hands of users. To summarize, the codebase forks allow developers to modify the code without changing all the blockchain protocol.

 

The major Bitcoin Forks

Bitcoin, the pioneer blockchain cryptocurrency, has had several forks. Recognizing  the original Bitcoin blockchain (called Bitcoin Core) introduced by Satoshi Nakamoto, developers have made changes to Bitcoin Core’s blockchain protocol.  Forks of Bitcoin Core that happened are the following (see the Bitcoin forks map):

Bitcoin XT: August 2015

Bitcoin Clashic: February 2016

Bitcoin Unlimited: May 2017

Bitcoin ABC : This is a codebase fork intentionally incompatible with original Bitcoin iterations. Then Bitcoin ABC gave birth and established Bitcoin Cash in 2017.  

Bitcoin Cash: (August 2017) As an objective the increase in theory the number of transactions per second with a higher bloc size

Bitcoin Gold and Bitcoin Diamond : (October- November  2017) Alternative mining algorithm to allow users to mine at a cheaper price.

Bitcoin SV : Fork of Bitcoin Cash, with higher block size than Bitcoin Cash

SegWit2x (BTC): Few developers proposed a hard fork protocol called SegWit2x aiming to convince all Bitcoin protocol users. The project has failed.

Conclusion – What impacts do forks have on ?

When a hard fork is  performed, holders and miners of a quantity of the original currency will receive both the token of the new protocol as well as the old one.

For example, when you fork Bitcoin Cash if you had 1 Bitcoin at the time of the fork you will hold 1 Bitcoin and 1 Bitcoin cash after the fork.

.

If there is no consensus in the community, investors and miners are  split between the two existing projects and hold the two tokens.

For Bitcoin or any project, all these hard forks could  have been seen as a long-term threat because part of its market capitalization is dispersed over the other altcoins projects. But in fact, despite apparent technological improvements, the effect of  forks have been diluted. Because forks only correspond to 5% of the entire Bitcoin tree for less than 3.5% of its total capitalization (see chart).

 

Finally, Bitcoin has never been so strong. It is possible to see a Bitcoin hard fork to, one day, take over the core project and propose an improvement in technology. But for now, Bitcoin remains the winner, thanks to its age and track-record, its strong community, its visibility and its unequalled safety empowered by the number of miners. Forks are mutations that allow the development of this booming technology. They are a sign of the vitality of the blockchain technology.

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 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 ?

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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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

Difficulty of the article:

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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

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Yves Maillot

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The coming Bitcoin ‘halving’

The coming Bitcoin ‘halving’

The coming Bitcoin ‘halving’

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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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’.