Issue 100

Has Bitcoin reached a permanently high plateau?

Delivered on 15 February 2021 by Justin Pyvis. About a 5 min read.

Cryptocurrencies - Bitcoin in particular - are once again in the news. It's not hard to understand why, with the price of a coin rapidly approaching $50,000 following Elon Musk's announcement that Tesla had purchased $1.5 billion in bitcoin and will start accepting it as payment:

It's not just eccentric billionaires such as Musk that are suddenly giving crypto some long-deserved attention, either. Mastercard announced last week that it "is bringing crypto onto its network":

Doing this work will create a lot more possibilities for shoppers and merchants, allowing them to transact in an entirely new form of payment. This change may open merchants up to new customers who are already flocking to digital assets, and help sellers build loyalty with existing customers who want this additional option. And customers will be able to save, store and send money in new ways.

The price of bitcoin has risen by around 760% from the pandemic-driven low in mid-March 2020. Is it a bubble? Most likely, yes. While having certain cryptocurrencies accepted on payment networks such as Mastercard is huge (and should help to reduce costs for certain transactions, such as international transfers), nothing much has changed since March 2020 to justify a 7x increase in price. Decentralised finance (DeFi) has the potential to disrupt stock exchanges and banking, but it's just potential and that's not why the price of Bitcoin is rising.

No, Bitcoin has risen 760% because we're in a stimulus-fuelled business cycle. Many of the world's governments and central banks unleashed large demand-focused programmes in 2020-21, driving up asset prices (the NASDAQ is up more than 100% over the same period).

Bitcoin is an asset that's relatively easy to buy, is liquid, has a finite supply and virtually zero carry costs. So when people are given 'free' cash that is yielding nothing and will gradually depreciate in value, they'll tend to speculate on assets such as Bitcoin. Add the fact that Bitcoin is best thought of as the gold of cryptocurrencies - a digital asset used as a store of wealth - but without the overheads and regulations, and it makes sense that it would rise during a large expansion of broad money supply and rapid growth in bank credit. Ray Dalio did a good write-up from that perspective last week:

There aren’t many alternative gold-like assets at this time of rising need for them (because of all the debt and money creations that are underway and will happen in the future). Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held. Because there aren’t many of these gold-like storehold of wealth assets that can be held in privacy and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need. It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative idea that could well not be around in short order to probably being around and probably having some value in the future.

Could Bitcoin rise another 10, 50 or 100% from here? No doubt. But just remember that all asset prices are elevated at present, not just cryptocurrencies. This run in price is not unique to crypto: if you are worried that the stock market will crash at some point soon, you should be equally worried that Bitcoin will crash. All the signs of overheating are there, with even 12 year-old children getting into the stock market! I'd love to say Bitcoin has "reached what looks like a permanently high plateau", but I think we all know how this is going to end when the monetary and fiscal stimulus dries up.

Shock. Horror. Australian authorities misuse data

Legislated privacy can be undermined, breached or simply ignored:

All law enforcement agencies investigated in a recent probe accessed Australians’ metadata without the proper authorisation, the Commonwealth Ombudsman has reported.

The Ombudsman identified a “critical need” for staff to understand the law after auditing 10 agencies’ compliance with controversial metadata retention laws that require telcos to retain information about communications for at least two years.

“We identified instances at all inspections in 2018-19 where agencies had accessed telecommunications data without proper authority. As such, the disclosure of the data was unauthorised,” the Ombudsman said in a report tabled in parliament last week.

Nothing is safe unless it's encrypted. Not even the "laws of Australia" can undermine properly implemented encryption, despite what former Australia Prime Minister Malcolm Turnbull might think. Remember, governments are notoriously poor at securing data:

The software flaw exploited by the suspected Chinese group is separate from the one the United States has accused Russian government operatives of using to compromise up to 18,000 SolarWinds customers, including sensitive federal agencies, by hijacking the company’s Orion network monitoring software.

Security researchers have previously said a second group of hackers was abusing SolarWinds’ software at the same time as the alleged Russian hack, but the suspected connection to China and ensuing U.S. government breach have not been previously reported.
Starlink is now delivering initial beta service both domestically and internationally, and will continue expansion to near global coverage of the populated world in 2021.

During beta, users can expect to see data speeds vary from 50Mb/s to 150Mb/s and latency from 20ms to 40ms in most locations over the next several months as we enhance the Starlink system. There will also be brief periods of no connectivity at all.

As we launch more satellites, install more ground stations and improve our networking software, data speed, latency and uptime will improve dramatically.

Yes, SpaceX's Starlink has received nearly $1 billion in US government subsidies ("to support rural broadband customers"). It was one of 180 companies that received a combined total of $9.2 billion in subsidies. That doesn't make it right but at least SpaceX didn't actively seek out the favour.

But how cool is it that a private company is rolling out a global broadband network with minimal taxpayer support? The Australian government, you might recall, has so far spent more than $A57.7 billion on a national broadband upgrade (the 'NBN') that is today valued below $A10 billion. Starlink's beta product is slightly more expensive than the equivalent NBN plan and has a relatively high setup fee, but it's low latency (20-40ms versus the ~60-80ms I get when pinging Bing, which may soon replace Google in Australia) and costs nothing in additional taxes.

There are of course regulatory and national security questions that still need to be answered. For instance, can the US government (or any other government) order Starlink to cut off an entire city or country? What metadata are being collected, and where will it be stored? I'd prefer it if Starlink was designed to be more decentralised, with anyone allowed to upload a 'node' (satellite), much like they can with the internet or on the Fediverse. But it's promising nonetheless.

Issue 100: Has Bitcoin reached a permanently high plateau? was compiled by Justin Pyvis and delivered on 15 February 2021.