I was going to post this as a comment in the comments section for a weekend’s links from several weeks back, but then thought, “Why not pad it out and see where it goes?”. Unfortunately I came down with a bug before I got a chance to publish it and then went on holidays for a week. However, since the market hasn’t yet collapsed and the same forces are still at work, I thought I may as well finish it off and post it.
Anyhow, all of these thoughts and musings were triggered by Hester Peirce’s comments in this Zero Hedge Article:
Any government efforts to ban Bitcoin would be “foolish,” said Hester Peirce (aka “Crypto Mom”)….”I think we were past that point very early on because you’d have to shut down the Internet,” Peirce said, adding, “I don’t see how you could ban it. You could certainly make the effort. It would be very hard to stop people from [trading Bitcoin]. So I think it would be a foolish thing for the government to try to do that.”– Hester Peirce aka Crypto Mom, via Zero Hedge
First up, it wouldn’t actually be that hard to take down BTC if the Govts actually wanted to, the Chinese Govt alone could pretty much cripple the network and even trigger chain death, simply by forcing all Chinese miners to cease mining BTC.
Moonboy’s love saying how decentralised BTC is, yet if you mentioned diversification risk then they stare at you blankly – 60% of BTC mining occurs in China. Removing 60% of hash would cripple the network, result in sky rocketing transaction fees, until the next difficulty resetting which could be weeks. The network would probably survive with a 60% loss of mining capacity, but if something like 80% was suddenly removed, I imagine chain death would probably ensue.
An advantage in not publishing this post two weeks ago is that an exact example of this occurred over the weekend, when a coal mine flooded last week in China and ended up shutting down one-third of all of Bitcoin’s global computing power. For those wondering about the impact, firstly it caused the already swollen BTC mempool to double from 150k bytes worth of transactions to 300k bytes worth of transactions. While secondly it caused the fees associated with making a BTC transaction soar from $5-$20 to $110 for a regular transactions or $148 for a priority transactions… those fees are USD by the way.
But of course the main barrier to this scenario is that no Govt wants the ‘blood on their hands’ for initiating the destruction of a supposedly ‘2 Trillion’ dollar market – based on the massively inflated crypto market cap measurements. Govts would have to have a pretty good reason to execute such a crypto coup de grâce like that to bring BTC down. The reality is that they have many options at hand to destroy the cowboy crypto industry. The main one is simply ensuring that existing KYC and AML laws, that other existing financial systems are obliged to follow, are applied and enforced within the crypto industry, and sanctioning or prosecuting those that don’t. The other option, and one that I think that will actually destroy the industry quicker, is to simply do nothing. Frankly I believe the Crypto Complex is being giving enough rope to hang itself, and by that I mean, they are simply waiting for the last remaining liquidity in the system to disappear.
Every single day $50m USD of real fiat liquidity has to leave the crypto eco-system, to pay for real life mining electricity costs that have to be paid to power stations, like the one that flooded in China, in real US dollars. This outflow ignores other crypto currency mining costs (which are admittedly much smaller – I think ETH is only like $1m a day), and incidental mining costs – like new mining rigs. Trouble fresh real USD injections are starting to fade, and fade rapidly when you compare them to overall crypto market capitalization currently around $2Trillion dollars.
First up, with thanks to CryptoWhale, if the Grayscales Investment BTC Holdings Fund is indicative of wider speculative retail inflows then its flatlining in terms of new inflows , at the very least suggestive of some slackening off in speculative inflows across the wider market. The flateline in new inflows also matches the emerging flatline in BTC price at around $60k:
This flatlining of BTC price gains is unusual in terms of previous BTC blow offs – suggesting that the final explosive move is either yet to occur or that this top will play out differently.
While people look at TA charts and expect similar patterns to unfold as prior periods of BTC price moves and suspected periods of price manipulation, what makes this event different is the law of large numbers starts to kick – sourcing liquidity for a $2 trillion dollar ‘market’, is a whole different kettle of fish in terms of difference to a $12bn market or even a $50bn market.
At the moment there are 3 main stable coin providers, USDT, USDC and BUSD, which are respectively Tether, Circle Coin and Binance Dollar. Binance is affiliated with the Chinese exchange whose CEO spends most of his time scampering around the world hiding out in different locations, while Circle Coin is affiliated with DCG who also have investments in Coinbase and many of the other US exchanges.
Currently around $1.2bn in USDT is being pumped into the crypto complex every week, which is doing little more than allowing it to treat water around $60k. But this is imho is just 100% fake liquidity (feel free to disagree in the comments) that has been manufactured out of, and is backed by, other crypto currencies, which will eventually lead to an inevitable daisy chain of default.
So leaving aside Tether, this just leaves Circle Coin and Binance Coin as proxies for real USD inflow. Both are supposedly USD based funds and so for argument’s sake I’ll assume are 100% backed by Cash, effectively they represent actual hard currency entering the system. Anyhow, because I was both bored and curious about the liquidity question I went back through all the twitter notifications produced by the @usdcoinprinter bot of printing events since the start of April and put them into a chart:
This chart shows the daily minting of USDT (Blue), USDC (Yellow), BUSD (Green) and daily mining costs (Red). As you can see the daily mining costs already exceed the real USD liquidity inflow from USDC and will shortly exceed the daily inflow from BUSD too. You will also note that since around the 14th of April – the day of the Coinbase float, there has been virtually no additional USDC or BUSD printed.
If this trend continues, then by this time next month mining costs alone will have drained most of the real USD liquidity that entered the crypto complex in April (based on the limited analysis of using the stable coin flows as a proxy).
Now the above analysis is by no means complete, there are still many other inflows and outflows or real USD, but again, as with the Grayscales example, it is suggestive that the rate of real hard currency entering the system has at best flatlined.
So why does all of this matter? Because when crunch time eventually comes and real bills or real taxes have to be paid in real dollars, there will come a point when the available real USD liquidity in the system won’t be able to meet the outflows associated with simple mining, let alone these other hard currency outflows/spends. That will be the moment that Wile E. Coyote realises that there is nothing but air between him and the ground, which is a long, long way down.