Cryptocurrency energy usage

This article says Tesla's CEO Elon Musk and former Federal Reserve chairperson Janet Yellen are concerned about the huge amount of energy used for cryptocurrency mining. Tesla has halted purchases of vehicles with bitcoin due to such concern.

The price of Bitcoin (BTC-USD) fell about 13% in the last two days. The price of Ethereum (ETH-USD) fell about 10% in the last two days. I suspect the amount of energy that mining consumes is a major driver for the price drops. The mining -- done by many miners -- is to verify transactions on the blockchain.

For many months I have suspected the amount of energy mining uses is a growing problem and will inhibit the growth of cryptocurrencies unless something is done to require less energy. On the other hand, some are less concerned. Professor Carol Alexander said: “Almost all the trading is not done on the blockchain. It’s done on secondary markets, centralized exchanges. They’re not even recorded on the blockchain.”

I assume Alexander refers to exchanges like Grayscale's trusts (e.g. tickers GBTC, ETHE). If somebody buys or sells shares in the trust, there is a counterparty selling or buying shares. The cryptocurrency per se, Bitcoin or Ethereum, is not traded and therefore the transaction doesn't need mined. Only the beneficial owner of the shares changes. The trust holds legal title to the Bitcoin the same way before and after. 

P.S. I didn't post for about two weeks due to selling our previous house, moving into our new house, and a vacation for several days to Zion National Park, Bryce Canyon, the Grand Canyon, and Phoenix. 

China's government's view of cryptocurrency

https://www.cnbc.com/2021/04/19/china-calls-bitcoin-an-investment-alternative-marking-shift-in-tone.html

China's government did more or less what Turkey's did. It regards Bitcoin and other cryptocurrencies as "investment alternatives" but not "currencies per se." In other words, one can be a "store of value" but not a "medium of exchange." The usual meaning of money is something that has both properties.

Wikipedia: "The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money."

China's government wants its yuan to have a monopoly on money.

Turkey bans crypto payments

Turkey Bans Crypto Payments

Note that Turkey's government did not ban cryptocurrencies entirely. Turks can still own and buy a cryptocurrency as an investment or inflation hedge. But Turkey's government wants to keep a monopoly for its lira as the means of payment (or means of exchange). "Readers should note that Turkey’s latest ban does not stop Turkish citizens from trading cryptocurrencies. They can still buy bitcoin as a hedge against inflation."

"Citizens of countries facing high inflation and fiat currency crises, such as Turkey, have turned to bitcoin in the past few years, raising hopes of widespread adoption across the globe. Turkey’s inflation topped 16% last week, and its currency, the lira, has depreciated by 10% this year, having dropped by 24% in 2020.

Crypto Fearmongers Get Pushback From Former CIA Director

 Janet Yellen, Bitcoin And Crypto Fearmongers Get Pushback From Former CIA Director

I have heard of drug dealers with suitcases full of greenbacks. I haven't heard of drug dealers transacting on the streets with a cryptocurrency. 😊

Earlier on this blog: Janet Yellen on cryptocurrency

Bitcoin and freedom

Today I indulge in a little self-congratulations. Today is the 5th anniversary of this blog.

My posting the following articles is not an April Fools joke.

Bitcoin unleashes the sovereign individual

How Bitcoin Provides Freedom

Bitcoin and Walmart

What happens when Walmart buys $1billion of bitcoin? 

On March 2 here I wrote about, or at least hinted, how a cryptocurrency such as bitcoin could make international transactions easier. Presently to buy goods from foreign sources, Walmart likely faces cross-currency transactions of many kinds -- Euro, Japanese yen, Chinese yuan, India's rupee, etc. Imagine how much simpler it could be for Walmart if all these transactions could be done with only bitcoin, with the foreign trading partner pricing what it sells to Walmart in bitcoin rather than its local currency. That would greatly simplify matters for Walmart and probably require far fewer man-hours. 

Making transactions easier and simpler is not limited to current ("spot") transactions. Futures and options contracts are available for bitcoin. Walmart could use them to "lock in" prices for things it steadily buys or sells for weeks ahead of time. In other words, such contracts facilitate planning and reduce uncertainty.

Of course, the Bitcoin magazine article is speculative, not about how things are now. But if the speculative situation were to become real, it could be quite revolutionary.  

Addenda 4/1/2021: Bianco Research CEO Says Next Reserve Currency Will Be a Cryptocurrency Can crypto actually take on the $US’s reserve currency role around the world?

Stablecoins

Stablecoins And How They Work The following text within quotes are from the article.

"A stablecoin is a cryptocurrency whose value is pegged to a real and stable asset like gold or fiat currencies, in order to combat the price volatility experienced by cryptocurrencies like Bitcoin or Ether."

"Many stablecoins are collateralized at a 1:1 ratio with certain fiat currencies, such as the U.S. Dollar or the Euro, which can be traded on exchanges. Other stablecoins can be pegged to other kinds of assets, such as precious metals like gold, or even to groups of cryptocurrencies.

This means that if you buy a stablecoin that is pegged to the U.S. dollar at 1:1, meaning 1 stablecoin is equivalent to $1, you can sell your stablecoin and redeem your $1 at any time."

"Stablecoins, as digital currency that can be used to make payments across the world, have the potential to serve th[e] huge unbanked and underbanked population." China - 225 million unbanked adults in 2017. India - 190 million. U.S -  25% of U.S. households (> 50 million adults?). "From migrant workers who want to send money home, to businesses who make payments to overseas suppliers or employees, stablecoins have the potential to replace traditional currency to facilitate faster, more secure, easier, and cheaper cross-border payments."

Types: 

1. Fiat, the most common, pegged to the U.S. dollar or the Euro.

2. Crypto-collateralized pegged to other cryptocurrencies.

3. Commodity-collateralized backed by stable assets, like precious metals, gold, real estate, and oil.

Stablecoin per Wikipedia

Harvard Business Review: Is Stablecoin the Next Big Thing in E-Commerce?

Nigerians Turn to Stablecoins for Protection Against Inflation

The inflation rate of Nigeria's currency naira has been more than 10% since 2016 (link). So many Nigerians have turned to stablecoins for protection of savings. Informal small savings accounts, called esusu, are formed by around 12 or more friends, colleagues or neighbors. Allegedly, Nigeria’s informal “cash” economy accounts for around 64% of 
Nigeria's GDP.

Stablecoins are not as prominent in the U.S.A, presumably because the $US inflation rate has been low. On the other hand, the cryptocurrency that Facebook has talked about creating is the stablecoin type (link). I suspect Facebook's customers for its product would be largely foreign, or U.S. residents sending money outside the USA. 

Stablecoin Regulation in The United States

Cryptocurrency primer

Bitcoin and cryptocurrency: Myths and realities  Part 1, 5 September 2019

Bitcoin and cryptocurrency: Myths and realities – Part 2: The journey  19 September 2019

Bitcoin and cryptocurrency: Myths and realities – Part 3: The foundation  6 January 2020

On the lighter side, Fortune says: The ancient mathematical pattern predicting Bitcoin will hit $70,000  Said pattern is the Fibonacci sequence. "Numbers don't lie" - Max Halloway or anonymous. 😉

Jimmy Dore interview with Max Keiser 

Cryptocurrency outlook #5

Bitcoin Magazine: The Insurance Industry And Bitcoin

The article pertains to and refers to life insurance companies. It doesn't mention other kinds of insurance products, such as auto, homeowners, commercial property, and health, and therefore doesn't apply to them or much less so. The magnitude of interest rates affects the pricing of life insurance and annuities more so than the other products because the former are longer-term and without the ability of the insurer to adjust premiums after the contract is issued.

The following numbers illustrate the effect of interest rates on (pure) premiums for whole life insurance.  Here "pure" means they don't include non-mortality expenses or the probability of policy termination. (The premium amount buyers pay include these things.) For an issue age 40 or less the annual premium with the interest rate = 0.05% is more than 2x the annual premium with the interest rate = 5.0%. The ratio declines above age 40, but at age 60 is still about 1.4x times that for 0.5% interest than for 5.0% interest. For annuities the effect of lower interest rates on premiums is even more.

While such pure premiums are not what buyers pay, they are used in calculating reserves -- as required by statutory insurance laws -- for a life insurance company's in-force policies. Such reserves appear on the liability side of an insurer's balance sheet and thus have a real effect.

Kiplinger: How much Bitcoin should you own?

  

Cryptocurrency outlook #4

Joe Biden picks Gary Gensler as SEC Chair. Fox Business and Bitcoin.com comment on the possible effects on government regulation of Bitcoin and other cryptocurrencies. 

Fox: "If bitcoin and other cryptocurrencies were deemed to be securities, they would fall under the purview of the SEC. Exchanges that facilitate the trading of such cryptocurrencies would also need to have the appropriate investor protections in place," Gensler said (my bold).

"He pointed to improvements in the areas of payments systems, trade finance, and medical-records technology as areas where blockchain has proven useful. Gensler is currently a professor at the Massachusetts Institute of Technology and teaches about blockchain."

Bitcoin.com: Gensler clarified: “To the extent that somebody is offering an investment contract or security that’s under the SEC’s remit, and they have exchanges that operate there, then we have to make sure there’s investor protection” (my bold).

On the other hand, “If it’s not that, and it’s a commodity, as bitcoin has been deemed to be, then it’s either a question for Congress … or it’s possibly a question for the Commodity Futures Trading Commission,” he described (my bold).

Furthermore, the professor also said that the SEC must ensure that crypto markets “are free of fraud and manipulation.”

This is an example of whether or not x falls under the concept X in the context of government regulation. Whether it does or not can have significant consequences. Maybe x falls under both. For cryptocurrencies there is one concept - investment contract or security - for the SEC and another - commodity - for the Commodity Futures Trading Commission. 

Cryptocurrency outlook #3

Bitcoin is at a tipping point and could become 'currency of choice' for global trade, Citi says

https://www.theblockcrypto.com/post/96599/bitcoin-international-trade-currency-citi

“A focus on global reach and neutrality could see bitcoin become an international trade currency. This would take advantage of bitcoin’s decentralized and borderless design, its lack of foreign exchange exposure, its speed and cost advantage in moving money, the security of its payments, and its traceability.”

Cryptocurrency outlook #2

Harvard Professor Kenneth Rogoff Warns Central Banks Will Never Allow Bitcoin to Go Mainstream

Professor Rogoff says:

"As it really starts to compete with ordinary, fiat currencies, government currencies, I think they’ll clamp down on it like a ton of bricks. They are not going to allow that to happen."

"But make no mistake, the governments need to retain control over taxation, controlling crime, etc. They need to maintain control over the unit of account — the currency. Yes, private innovation can come out for a while, but eventually over the long course of history, the government first regulates and then it appropriates, and I think we can see that happening here."

Cryptocurrency outlooks

Following are four opinions about the outlook for Bitcoin and other cryptocurrencies. Three are pessimistic or negative at this time. That's not surprising given the recent sharp rise in Bitcoin's prices.

'Big Short' investor Michael Burry says he doesn't hate bitcoin but thinks its 'long-term future is tenuous'

I guess Burry says "tenuous" based on Bitcoin's (and others') phenomenal rise during the past 4 months. Yahoo Finance: BTC-USD. Click on '6M' above the chart to see the rise graphically.

Creepy Bill Gates Announces That He’s Not a Fan of Bitcoin – Warns People Who Aren’t as Rich as Elon Musk from Buying It

Really? That's a reasonable opinion if cryptocurrency would be a large portion of one's investable assets or a large amount needed in the near future. However, what if it's a small part? How is it any worse than buying a few lottery tickets with multi-million dollar payoffs? Risk assessment is not an all-or-nothing matter; assessing the magnitude of risk is what's important. Stop being a control freak of others' lives, Bill Gates! It's a big enough task to control your own. 

Should I buy bitcoin? Why the cryptocurrency is on the verge of a bear market

"To be sure, bitcoin’s wobbles aren’t unusual but the crypto’s reputation for volatility is one reason naysayers contend it isn’t suited to serve as a medium of exchange."

“To the extent it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering,” Janet Yellen said.

This is reasonable and to be expected from one who favors a government-controlled monopoly on the widely-accepted medium of exchange. Transaction costs for Bitcoin and other cryptocurrencies are too large to be a widely-accepted medium of exchange for small transactions. This argument gets weaker as transaction size gets larger. Transaction cost divided by the value of the whole transaction declines as the latter gets much larger. Thus Bitcoin and other cryptocurrencies are more feasible for large business transactions.

Charlie Munger, Warren Buffet's long-time business partner, says never to crypto and gold.

Come on, Charlie. Never? Even buy low and sell high? I know that's difficult to achieve, but I see nothing wrong taking on a little risk and watching it like a falco columbarius. 🙂 If you had not taken risks, you would not have had the tremendous success that you did!! Little or nothing ventured; little or nothing gained. Does this mean your intended audience should not invest in Berkshire-Hathaway stock either? You know it has risk. Click on '5Y' above the chart here and see what happened mid-February to mid-March last year. BRK-B's price fell about 26%. Somebody could have bought BRK-B high and sold it low in a panic.

Law, blockchain, cryptocurrency

Law Decoded: Bringing blockchain into securities markets, Feb. 12–19

Laws regarding blockchain and cryptocurrencies are far behind the times due to the latter's newness. However, some laws are being written to try to catch up.  

The development will not be easy due to the international scope of blockchain and cryptocurrencies. The privacy of cryptocurrencies has made them attractive to criminal activity, but the above article has little to say about that. However, most of the rapid growth of cryptocurrencies has not been due to criminals.  The use of cryptocurrency as money and for investing has also gotten the attention of monetary authorities such as the U.S. Federal Reserve System.

A Fed[eral Reserve] president predicts the Bitcoin boom won’t last. Really? There is little risk of that prediction being wrong. There is far more risk of being wrong by predicting a big bust will be very soon.

Bitcoin’s Rise Should Make Regulators Ask if the Fed’s Policies Have a Hand in It: WaPo

"While calling the Fed justified for trying to boost the pandemic-afflicted economy by encouraging investors to put their funds in job-creating activities instead of parking it in banks or government bonds, the lack of investment opportunities has driven many to chase yield via 'speculative vehicles - bitcoin very much included', the newspaper said." (WaPo).

Heh. The Fed people want control. The Fed people or the WaPo editors -- maybe not intended -- call investing in government bonds, which supports more government spending, a non-job-creating activity!😉 It is surely the opposite of what they so often say.

Janet Yellen on cryptocurrency

Nominee Secretary of State Yellen on bitcoin

"Incoming Treasury Secretary Janet Yellen has revealed some reservations about cryptocurrency, especially as it could relate to crime and terrorism." 

Is the ex-Chairman of the Federal Reserve really worried about criminals using cryptocurrency? If yes, she needs to look more closely at the $US. Suitcases of $US are used by drug dealers!!