Why Is Grayscale Buying 100% Of The Mined Bitcoins Since Halving

Grayscale is buying 100% of the bitcoins (and more) that have been mined since halving.

Grayscale’s fund is for the investors who want to buy and hold Bitcoins without going through the trouble and technicalities of acquiring and storing Bitcoins safely. Instead the investors simply buy shares in the Grayscale Bitcoin Trust.

But it’s not so difficult to buy and store Bitcoins especially with companies like Coinbase in business that make buying BTCs as simple as using PayPal. Then what is this new kind of increased interest from this certain class of investors who are only willing to buy Bitcoins through Grayscale’s trust? Let me explain.

This new attention seems to be coming from IRA / Roth IRA retirement and pension accounts that are eligible for tax benefits when buying BTC through Grayscale’s trust. In other words, with macro instability and to hedge the COVID-19 related crisis, the retirement and pension money is going into crypto-assets.

There are many out there who view Bitcoin as fake-money or a ponzi-scheme. At the same time the world is exchanging “real cash” for the “fake one” at 30 million dollars per week from their retirement and pension accounts to weather a storm.

Libra Vs Bitcoin

The optimist in me loves Bitcoin despite its many shortcomings. I don’t think Bitcoin will ever be as popularly used as Libra or another stablecoin payment system. Despite that, the optimist in me suggests Bitcoin is a great buy.

The realist in me recognizes how powerful Libra could be. For those of you who don’t know what Libra is, it’s a collateralized crypto-payment project by Facebook. Libra plans to offer basket of stablecoins like USD, EUR & GBP.

Here’s an intro video of the Libra Project.

There are many collateralized stablecoins already out there in the market so Libra isn’t planning to do something that isn’t done before. However the unique thing about Facebook is that whatever they do, they can plug and play that to 2.5 billion users.

Libra’s Advantages

Facebook demos that they will make sending money as simple as sending emojis with features to do so built right within the Facebook’s family of apps. Libra’s unique proposition in comparison to other available options is users and ease of use.

Libra or other stablecoins have several advantages over Bitcoin. The crypto-assets will be fully collateralized and backed by fiat currencies. The crypto-assets will be stable in value and the transactions would be really fast.

.. But Money Is Already Digital?

However, if you think about it, money is already digital. When you pay with your debit and credit cards, or you send money using your bank, or through PayPal, you’re passing value digitally. Money has been digital long before Bitcoin or any crypto-assets.

Digital is generally the opposite of anonymous and censorship-resistant. When you say digital, the information about your money is hosted on someone’s server. Who ever controls the server can see what you do with your money and can intervene, reverse or block actions that you may take with your money.

Cash in comparison is not digital but anonymous and censorship-resistant.

Bitcoin’s Advantages

Bitcoin’s # 1 strength is seldom talked about. It is the finite supply of Bitcoin which makes it deflationary in nature instead of inflationary which USD and all its digital variants including stablecoins & Libra are. The second most important feature is that Bitcoin is censorship-resistant because it is decentralized with no central control. The third one about anonymity could be argued upon. It does an OK job at being anonymous but since the ledger is out in the public, it isn’t fully anonymous.

Conclusion

The feature of stablecoins being stable like USD or EUR is not just a feature, it’s also a bug. One of the biggest disadvantages of money as we know it is that you can’t just hold on to money without losing value. You’re forced to have your money invested in real-estate, stocks & bonds for it to not lose value. Bitcoin as a money is designed to be free forever from the central bank’s control over the money’s supply and its movement. Because of this Bitcoin is designed to grow in value and hence it can not be stable.

The following table could be helpful

AssetDigitalDeflationaryCensorship-resistantStableAnonymous
BitcoinYesYesYesNoYes
CashNoNoYesYesYes
Stablecoins / LibraYesNoNoYesNo

Why Are These Exactly Opposite Money Events Happening At The Same Time

I am not an economist. I know nothing about it. Although, I like to preserve my wealth and I also like to read a lot about how to do that. So you can call me wealth preserver.

There are two money events happening right now. One of them is that the Federal reserve continues to print trillions and trillions of dollars to stimulate the economy. The other one is that Bitcoin is cutting its printing rate to half in about 7 days.

Both the events are happening at the exact same time.

When you increase supply of one thing by a lot and trade it with something of a fixed quantity, you’ll either need to pay more of the asset with an increased supply or get less of the asset with fixed quantity.

The long-term impact of the first event is that you’ll need more pieces of paper to buy assets with fixed quantities such as real estate.

The long-term impact of the second event is that you’ll need less number of Bitcoins to buy assets with fixed quantities such as real estate.

Disclaimer: This is not an investment advice and should not be taken as one. I accept no responsibility for any loss, damage, cost or expense incurred by you as a result of any error, omission or misrepresentation on this site.

What Markets Do To You, And What You’re Supposed To Do

Facebook advertising can be overwhelming because of how inconsistent it can be. Despite it’s inconsistency, it still is and will continue to be my go to place for marketing. I’ve been busy with the launch of our new store as I mentioned in my last blog yesterday. So I’ll be writing this one in a hurry, so I can head back to work.

Markets. They are a good place for everyone to passively build wealth while you actively work on your business or in a job. But in times like this, markets can get the best of you. Let me tell you a story.

The first time I bought a Bitcoin was for $1000. The first time I sold a Bitcoin was for $200. I think most people are aware that Bitcoin went all the way up to $20,000 and trades today at $6000. I was a newbie in the markets. I continue to be even today, but I wouldn’t make that same mistake again. You shouldn’t either.

If you always wanted to own a certain asset whether it’s Bitcoin or stocks or gold, now and the weeks to come could be the time to do that. 2020 is a better time to buy these assets, as they trade 30% below the price they traded in 2019. 2021 could be an even better time than 2020, but we don’t know that. What we do know is 2020 is a better time to buy than 2019.

As cliche as it may sound, buy when there’s blood in the streets and if you can’t, that’s okay. At the very least though, don’t sell when there’s blood in the streets.

Currency? Store of Value? Uncorrelated? What is Crypto?

During the market meltdown that started about 10 days ago, crypto-assets crashed the most. With Bitcoin going as low as $3500 from the high of $8000 in a single day posting the largest value drop since inception, everyone wondered what is Bitcoin?

People didn’t expect this drop to happen. Here’s Brian, CEO of Coinbase, tweet about this

People wondered if Bitcoin isn’t currency (volatile), or store of value (posting massive losses in value), and it’s also not uncorrelated with stock markets or other assets, then what is it?

Personally, it made me wonder that too. If it can’t even act as an hedge against the other markets, what is it? This drop affected my confidence in this asset-class. However, only a week later, my confidence picked up, at least by a bit.

During the first 3-4 days of the meltdown, I started to see that gold is losing value too. What is often seen as the safe haven during financial turmoil, was losing value too. The oil markets crashed as well, although that likely happened for a different reason, but it did. There was pretty much nothing that didn’t lose value.

What I concluded in the end is that during a financial crisis like that, people sell everything to move to cash. It doesn’t matter what asset class. It doesn’t matter what safe haven. All assets are sold so people can sit on cash and take their time to understand what’s happening before figuring out what to do next.

In the next week, I saw crypto-assets and Bitcoin rebound by a lot. It is trading above $6500 at the time of this writing. It is still below where it dropped from, but has recovered by a lot. Meanwhile, the stock market hasn’t recovered at all. The S&P 500 index for example is still down by 30%. What I’ve concluded from that is while all assets are correlated at the time of turmoil, only 10 days later, I can see crypto-assets moving in a different direction. I feel that in the coming weeks and months this uncorrelation will be very well established.

And that would be the first real world test that this asset-class would pass.

Bitcoin Halving & It’s Affect On The Price of Bitcoin

Bitcoin halving is approaching fast. It’s scheduled for May 2020. That is just under 110 days. Halving is when block reward for mining a block reduces to half. This happens every 4 years and it has a mega affect on the over-all economics of Bitcoin. Let me explain.

Roughly every 10 minutes, a Bitcoin block is mined. The miner or the pool of miners that mine the Block, a process needed to protect the Bitcoin network and confirm pending transactions, get rewarded for mining the block. At inception, this reward was set to 50 Bitcoins per block. 50 Bitcoins were given away as a reward to miner every 10 minutes. This reward reduces to half every 4 years. Right now it’s 12.5 Bitcoins per block. This reward will reduce to 6.25 Bitcoins per block in about 100 days.

How does halving affect Bitcoin? What is it’s significance? At the time of writing, an average miner spends approximately $5,000 in hardware and utilities to mine 1 single Bitcoin. The miner is then able to sell this Bitcoin at a premium in open market at about $8,300 which is what the Bitcoin is worth right now.

Almost always the open market rate is higher than the miner’s cost. If the open market rate gets lower at some point, the miners will not be able to protect the Bitcoin network and confirm transactions profitably. Which means some of the miners will discontinue their operations at that point. But the miners are also likely to stop selling Bitcoins below the cost hence miners in a way set the floor pricing for Bitcoin as well.

As the block reward halving happens in the coming weeks, the cost to mine 1 bitcoin will instantly jump from $5,000 to $10,000. As that happens, the open market rate is likely to float above the cost of mining. Add premium to that and we could see Bitcoin trading consistently above $10,000 may be even $15,000.

However, if the open market price is unable to catch up, some of the miners will withdraw operations to cut losses reducing mining difficulty, and pulling the price further down.

Crypto Revolution Will Happen

Often I hear from people about the “bad innovation” that’s happening around us. Not everything seems like a good idea to everyone. But I think innovation has never stopped, and never will, even if some people believe that it’s ruining lives.

The first industry that I watched very closely in my career was the music industry. Artists made their living by selling albums on cassettes and eventually CDs. But someone decided that music needs to be more portable and digital and so Mp3 was invented.

MP3 contributed big time towards music piracy and killed the revenues for musicians. Eventually Steve Jobs saved the day for musicians and record labels by offering “a la carte” music at 99C a piece to customers as a legal alternate to piracy. The digital music had to happen even if it happened at the cost of suffering of musicians and record labels.

In a similar way, I think crypto revolution will also happen, even if it happens at the cost of many other things. The money will be digital, decentralized and deflationary whether someone likes it or not. It’s likely that just like Mp3, Bitcoin or other crypto assets may need to be acquired from the iTunes of crypto-assets. But the crypto revolution will happen.

Is Cash Really Trash?

If you’re like me, born and raised in a Pakistani middle class family, you would have to earn your financial freedom. You weren’t born with it and you have to work your way up. Thankfully, unlike the previous generations, it’s easier for us to do so. With access to global markets, and a potential reach of 3.2 billion, you’ll make it even if you get fraction of the market.

But what happens once you achieve your financial goals? You earn a certain amount of money, and you stash your banks with cash and you feel it’s going to last for a certain period of time. But along the way, you also realize its running short faster than you thought.

There are 2 reasons why that could be happening. You may be over-spending and not keeping track of your finances. And that the inflationary financial system is not designed with you in mind. It is eroding your purchasing power, and pushing you two step backwards as you try to take a step forward.

This is especially true for Pakistan where inflation is high as well as the PKR has only weakened against the USD since the inception of the country. But it is also true for US where inflation at average is 2% per year for the last 10 years. Bitcoin on the contrary has only increased purchasing power in its life cycle and hence can be categorized as a deflationary currency, although some disagree.

But how do you solve this crisis? By not keeping the majority of your savings as cash. Cash can be bad, especially if it’s PKR you’re holding onto. Over 50% Americans invest in stocks for the long-term to preserve and grow their wealth while 0.125% Pakistanis do the same in comparison.

If you had held on to S&P 500 index for 10 years starting from Jan 2009 to Jan 2019, you’d have had a return of over 200%. It would have been over 250% if you re-invested dividends and this would be in USD, of course making additional money for you if your base currency was PKR.

Even if you invested in 2007 at the market peak and went through the financial crunch of 2008, you’d still be up over 100%, and 150% if you re-invested dividends.

If stocks isn’t your thing, and it wasn’t my thing too, you could invest your money anywhere you like. But it is absolutely necessary to do so. Because at the very minimum, you have to preserve your purchasing power, even if you’re not trying to increase your wealth with aggressive investing strategies.

It is still a good idea to hold on to some kind of cash. It’s great to have it in emergencies, and it’s what you need to survive. Having access to cash is also great when things are trading at a discount and markets are in turmoil. At the same time cash is the only asset that is guaranteed to lose value, other assets may or may not. And the only point I’m actually trying to make is cash isn’t as safe as I originally thought or as most people probably think.

Disclaimer: The information provided is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. I do not make any guarantee or other promise as to any results that may be obtained from using my content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. To the maximum extent permitted by law, I disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

Value Proposition of Bitcoin

Where does Bitcoin get its value from? It is an ever confusing question with no single correct answer because Bitcoin means different things to different people. Some say the scarce fixed supply which makes it rather rare to own is what gives it value. Some say the value comes from the event of halving of mining reward every 4 years making it even harder to obtain. And then there is bitcoin mining cost incurred due to computational power and electricity bills to keep the bitcoin network secure, which sets the floor selling price for the trading market. The average cost to mine 1 bitcoin at the time of this writing is $5,200. I think the value comes from all of above, and more.

In 2013, we had a large scale influencer marketing business running. We worked with 300 influencers and used their social media’s influence to drive traffic to content websites and e-commerce stores. The problem was it was difficult to run this business from Pakistan. Influencers were spread in different parts of the world. We had to make weekly payments (300 x 4 = 1200 transactions a month) to stay competitive in business and the banking infrastructure in Pakistan wasn’t just easy to run this kind of business at least in an automated manner.

While speaking of these issues at a conference in Mountain View, CA , I got advised by someone who had come from Germany to attend the conference. He asked me why do I not use Bitcoin to solve this payment crisis. That was the first time I heard of Bitcoin and had no clue what it meant. After looking it up on Google, I was blown away by the value this new invention offered.

Although we never used Bitcoin to solve that payment crisis, it made me believe that the value of Bitcoin also comes from utility like the one mentioned above. It solves a problem and that’s also Bitcoin’s value proposition.

Will Bitcoin trade above $100,000? I think so. Can I be wrong about this? Absolutely. I think there is a higher chance of me being wrong than right. Despite that, it still makes it an interesting risk/reward play.

Update: Here’s an analysis on Bitcoin price action by the very friend who first introduced me to it

Disclaimer: This is not an investment advice and should not be taken as one. I accept no responsibility for any loss, damage, cost or expense incurred by you as a result of any error, omission or misrepresentation on this site.