Bitcoin Newsletter: Off-chain transactions are 99% of Bitcoin activity; Bitcoin emerging as unit of account — for all crypto

I send this email newsletter every 2 weeks, then post it here a few days later. This is the fourth one. For now it’s just a private bcc-ed list. If you’d like to receive it, email or tweet me (@kgao).

My recent trades:

  • I bought more Dash at $17.07 USD, increasing my position to 4.3% of my total crypto portfolio. I will contribute half of my Dash to a pooled Masternode to earn a share of block rewards
  • Now my portfolio breakdown is: 85% Bitcoin (about on par with its crypto-dominance), 8% Ether, 4% Dash, 2% XMR, and 1% LTC
  • For long-term storage, I use Coinbase Vault, Xapo Vault, and Electrum
  • For trading, I use Coinbase’s buying service, Kraken, and Poloniex

COIN ETF updates their S-1 for the 9th time, a sign of optimism: Signed up 3 of the largest high frequency trading firms (KCG, Convergex, Virtu). Still no mention of the annual management fee. In the event of a Bitcoin hard fork (in my view, very likely), COIN will halt redemptions for 2-3 days and will then follow whichever fork has the most proof of work. No explanation of what happens to their coins on the minority / losing chain. [Source: reddit, S-1]

If you follow ICOs, join the Coinfund Slack. Smart discussion and real data and research. [Source: Coinfund Slack]. Coinfund does great research on ICO projects, including their recent analysis of decentralized dating platform Matchpool.

Bitcoin is the toll road for the crypto highway: Did you know 50+% of Ethereum trading is into and out of BTC? Yet another data point for my contention that Bitcoin is indeed a unit of account – for cryptocurrencies and digital assets. Remember that money has 3 functions – as a medium of exchange, as a store of value, and #as a unit of account. People discount Bitcoin’s utility as a unit of account due to its price volatility, but the majority of trading volume into and out of altcoins and digital tokens is through Bitcoin. Notice for example Coinmarketcap graphs for altcoin prices are denominated first in BTC, not USD [source: Coinmarketcap]

The regulatory landscape is brightening everywhere but in China: Poland officially recognizes bitcoin businesses and Denmark has appointed a bitcoin friendly digital ambassador. [source] Japanese legislation makes bitcoin a legal payment method (practically speaking, you’ll no longer need to pay a sales tax when buying bitcoin with yen) but like the BitLicense, it comes with expensive compliance requirements and may reduce short-term Bitcoin startup activity in that country. [source] CoinCenter is bullish that the US will simplify bitcoin regulations by moving to a federal, and not state-by-state, framework. [source] The only country with significant long-term uncertainty is China, where the PBOC has slowly and steadily been tightening the compliance noose around the exchanges and any form of bitcoin-based money transmission…

The top China exchanges have made withdrawing bitcoin much harder. You can still withdraw yuan. They just don’t want you sending yuan-denominated bitcoin out of the country. [source: reddit]. HaoBTC – a top 50 global exchange and top 10 China exchange – is shutting down its trading operations as a result of the increased scrutiny, compliance requirements, and reserve standards [source: CNLedger]. In response to Chinese tightening, Japanese exchange BitFlyer implemented no-fee trading and by some measures is now the world’s largest exchange with 21% of market share [source]

Read Woobull if you trade crypto: a great website for technical and data-driven analysis of cryptocurrency trading. Some particularly good pieces: on what an ETF will do to bitcoin’s price [source]; how much trading volume really happens in China [source]; liquidity and volatility of bitcoin compared to payment coins like Zcash and Monero [source]. I will share some notes in a future newsletter

Western Bitcoin exchanges process over $80 million in Bitcoin off-chain transactions per day; Bitcoin bank Xapo processes 500,000 off-chain Bitcoin transactions daily; Bitcoin gambling site PrimeDice processes 13 million off-chain Bitcoin bets per day. And so on. Cheap, high volume Bitcoin transactions are here already — though they require trust in a third party – Tuur Demeester [source: Medium]

If the above is true, then off-chain transactions could account for 99% of Bitcoin activity, since Bitcoin currently processes 300K on-chain transactions daily [source:].

A brief academic study identified 16% of public Bitcoin addresses: done in December 2013, the authors were able to identify 2M Bitcoin public keys. Just a reminder that Bitcoin is pseudonymous, not anonymous. And this was a comparatively low budget, fast turnaround analysis. [source: A Fistful of Bitcoins]

Own 8 stocks to eliminate 80% of nonmarket risk:
Statistics say that owning just two stocks eliminates 46 percent of the nonmarket risk of owning just one stock. This type of risk is supposedly reduced by 72 percent with a four-stock portfolio, by 81 percent with eight stocks, 93 percent with 16 stocks, 96 percent with 32 stocks, and 99 percent with 500 stocks. – Joel Greenblatt, You Can Be A Stock Market Genius [Kindle]

The median fiat currency depreciates 4% every year: $100 in 1900 becomes $1 by 1990. [source: Meb Faber]

If you asked us two years ago which crypto-currency or technology would likely become the de facto standard, we would have told you ‘something like Bitcoin, but probably not Bitcoin’. After witnessing these network effects in action, we are now firmly in the ‘more than likely it will be Bitcoin’ camp. – Marcus Swanepoel [source: Medium]

Satoshi’s breakthrough with money was to provide social scalability via trust minimization: reducing vulnerability to counterparties and third parties alike. By substituting computationally expensive but automated security for computationally cheap but institutionally expensive traditional security, Satoshi gained a nice increase in social scalability. A set of partially trusted intermediaries replaces a single and fully trusted intermediary. – Nick Szabo [source: Nick’s blog]

If you enjoyed this essay, here’s a list of the assets I own and the ones I’ve researched. Find me on Twitter and signup on the right to receive an update when I publish a new essay.