1. Bitcoin celebrates its 14th Birthday – revisiting the narrative

The Facts:

• 14 years ago on January 3rd, 2009, the first bitcoin block has been mined, with inventor(s?) Satoshi Nakamoto appending the message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” to the block.
• The message referred to the British newspaper headline, announcing plans for yet another bailout for banks due to financial troubles and credit constraints.
• The core ethos of Bitcoin is to establish a censorship resistant, immutable, permissionless, trustless peer-to-peer version of electronic cash that does not need to rely on financial intermediaries.
• Fun-fact: Since its inception Bitcoin has been declared “dead” almost 400 times by the mainstream.
• Fun-fact: Since its inception bitcoin has seen an astonishing performance of 1’690’706’971 % price appreciation.

Why it’s important:

• More than 1.4 billion adults unbanked globally, with 54% of the unbanked living in just 7 developing economies, offering lots more potential for financial inclusion.
• Crypto adoption is especially prevalent in developing countries with weak currencies and high inflation rates, adoption is less distinct in leading developed economies with more “moderate” inflation rates.
• More than half of the unbanked in most developing countries and regions own a mobile, offering lots of potential for further Bitcoin and crypto payment adoption.
• Fiat currencies exist for only 27 years on average and have seen the highest worldwide inflation rates ever in the past 50 years.
• The average inflation and therefore depreciation in purchasing power amongst the major 24 economies’ fiat currencies stands at 13% annually, implying a halving of purchasing power every five years.
• Bitcoin’s inflation rate currently stands at a mere 1.72% annually, and will continue to approximate its 0% issuance asymptote through future halvings.
• Bitcoin is the first to offer a strong and proven alternative long-term store of value, medium of exchange and unit of account to global fiat currencies in existence.
• Until 2023, two nation states made Bitcoin legal tender, El Salvador, and the Central African Republic, with other countries having legalized it as payment method.
• Bitcoin operated flawlessly for the past 14 year, experienced no outages, hacks and records roughly ten times less illicit activity than global GDP (Gross Domestic Product).
• Bitcoin remains the core asset of the crypto asset class, not only from a narrative standpoint, but also from a performance standpoint, as only three crypto assets out of more than 20’000 managed to outperform their BTC trading pair in their second market cycle.
• Lastly, the cascade of scandals and bankruptcies of CeFi (Centralized Finance) firms within crypto, and in TradFi, alongside over indebted nation states within the global fiat systems, shall be a reminder that Bitcoin does not require CeFi, TradFi or banks, but that institutions and nations do need Bitcoin.

2. Bitcoin hash rate dominated by only two mining pools

The Facts:

• Bitcoin’s mining centralization shift from January 2021 with low dominance across individual mining pools and high dominance of nation states, China controlling 53% of global hash rate, to high mining pool dominance and lower nation state dominance as of January 2023.
• More than 50% of bitcoin blocks have been mined by only two bitcoin miners/mining pools over the course of the past ten-day period.
• Bitcoin mining pools AntPool and Foundry USA have respective shares of 24% and 27% of the produced blocks.
• Of the current global hash rate, 38% stems from miners residing in the United States, 21% from mainland China, followed by Kazakhstan contributing 13%.

Why it’s important:

• The leading three countries account for more than two thirds of total global hash rate, 72% to be precise, implying tremendous dependency on national politics.
• Just two mining pools controlling more than half of the total global hash rate implies heavy centralization and reliance on single actors, contradictory to the idea of a decentralized blockchain.
• Recently, bitcoin miner Core Scientific shut down 37’000 Bitcoin mining rigs belonging to its biggest client, Celsius Network’s subsidiary Celsius Mining, amidst its own bankruptcy, adding to the concentration of the largest bitcoin miners.
• Especially in the rise of the OFAC (Office on Foreign Asset Control) recently sanctioning Tornado Cash, and subsequently most blocks being produced censorship compliant temporarily, questions may be raised towards the risk of bitcoin miners being potentially put at risk of sanctions and censorship restrictions.
• Especially problematic, Foundry has been created by troubled Digital Currency Group (DCG), back in 2019, and both companies’ success is closely tied together, which might be detrimental given the recent controversies around DCG and Genesis.
• Similarly problematic is Bitmain being the owner and sole operator of Antpool, while being the leading mining hardware manufacturer, with both companies residing and operating out of China, being subject to its influence and political course.
• However, even the great miner exodus in 2021, following China’s mining ban has been absorbed very well by the network, reaching new hash rate all-time highs within that same year, proving Bitcoin’s ability to adapt and persist.
• Despite strict nation level bans of bitcoin mining, China still accounts for one fifth of the global hash rate, attesting to the tenacity of Bitcoin’s permissionless underlying network.
• Given the tough macro environment and low bitcoin mining profitability, as covered in The Weekly Wrap, the risk of cannibalization amongst bitcoin miners in the industry, with “the winner takes it all”, adding to concentration and centralization of the hash power amongst fewer and fewer players is amplified tremendously.

3. Crypto downfalls and aftermath unfolding further – Massive withdrawals from Silvergate, Genesis considering bankruptcy, Celsius court ruling and 3AC co-founder subpoena

The Facts:

• Silvergate Capital bank saw roughly $8.1 billion in withdrawals in Q4 of 2022, with its crypto holdings declining to $3.8 billion down from $11.9 billion.
• In the aftermath its shares lost tremendous value, dropping more than 40%, matching the 40% of its staff it recently had to dismiss.
• Genesis is considering bankruptcy amidst laying off 30% of its workforce as the financial turmoil surrounding DCG’s subsidiary unfolds further.
• Furthermore, Three Arrows Capital co-founder Kyle Davis received a subpoena from US judges via twitter, enquiring about the downfalls of the once famous crypto hedge fund.
• U.S. bankruptcy judges ruled this week that Celsius’ customer deposits are property of Celsius.

Why it’s important:

• The steep decline in Silvergate’s assets under control (AUC) forced it into a fire sale of its assets, at a loss of $718 million total, mainly caused by a bank-run-like withdrawal of funds due to fear caused by the FTX debacle.
• As a major partner and service provider for the likes of Coinbase, Gemini and FTX, Silvergate was doomed to be affected sooner or later from the most recent troubles surrounding its clients.
• With approximately $900 million of Gemini’s customer funds still being locked by Genesis, since halting all withdrawals on November 16th, the considered bankruptcy is most certainly causing another domino to fall and cause further chain reactions in the crypto sector.
• Infamous Three Arrows Capital was one of the first CeFi actors to fail, filing for bankruptcy on July 7th, 2022, in the continuous stretch of fallouts ever since, while owing significant funds to Voyager (filed for bankruptcy), and Genesis, which considers bankruptcy as of now.
• The court issued subpoena, enquiring the release and submission of crucial documents might shed new light on the companies dealings and the reasons behind its failure.
• In aggregate, the crypto sector is not yet out off the woods, as contagion is continuing to spread amongst affected entities with no clear end in sight.
• Furthermore, the recent macro data showed inflation in the EU to remain elevated, at 9.2%, though cooling off somewhat, with warnings that the U.S. inflation has not yet “turned the corner”.
• With continuous macro constraints in the near future and further hits taken, the crypto industry as a whole has been stricken with more hurdles to overcome amidst its bear market, before a recovery could set in.

In other news

• Celsius Network wins ownership case over its customer’s funds (via WSJ)
• Binance acquiring Korean crypto exchange Gopax (via Cryptoslate)
• Coinbase $100 million settlement over KYC case (via New York Times)
• Microstrategy sells and buys bitcoin for tax optimization (via Decrypt)
• SEC interrupts Binance’s $1 billion acquisition of Voyager (via Coindesk)
• Class arbitration against Genesis by Gemini clients (via Coindesk)
• Croatia adopted the euro as national currency (via Seeking Alpha)
• Indonesia plans to launch national crypto exchange this year (via Delphi Digital)