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26. 14/01/2019 09:04
Bitcoin Will Still Bite the Dust

Back in August 2014, I discovered that the bitcoin mining industry had the industrial structure of a natural monopoly. A natural monopoly is a market in which production is most efficient with a single producer.

This discovery came as a shock, but the implication was clear: Bitcoin could not survive in the long run. As a check, I field tested my reasoning on various people who are economically literate. None disagreed.

When I first arrived at that conclusion, bitcoin’s price was $379. Since then, its price rose to nearly £20,000 and has since fallen to a value $3,621 at the time of writing.

Does the subsequent price behavior of bitcoin mean my prediction was wrong? No. I still think that the long-run equilibrium price of bitcoin is zero. It just hasn’t bitten the dust yet.

My reasoning is based on two simple economic arguments. The first is that the bitcoin mining industry is a natural monopoly and a natural monopoly undermines bitcoin’s core value proposition. The second is that in markets with zero regulatory entry barriers, an inferior product cannot survive long-term. Either of these arguments is sufficient to produce my conclusion that the price of bitcoin must go to zero in the long term.

Together, they are more than sufficient to establish that conclusion.

I have also yet to hear a single intelligent challenge to this argument from the bitcoin community. Instead, the typical response has been personal abuse. Name-calling is no substitute for a reasoned response, however.

Let’s consider these two arguments in turn.

Bitcoin Mining Is a Natural Monopoly

To work as intended, the bitcoin system requires atomistic competition on the part of the miners who validate transactions blocks in their search for newly minted bitcoins. However, the mining industry is characterized by large economies of scale.

Indeed, these economies of scale are so large that the industry is a natural monopoly. The problem is that atomistic competition and a natural monopoly are inconsistent: the built-in centralization tendencies of the natural monopoly mean that mining firms will become bigger and bigger – and eventually produce an actual monopoly unless the system collapses before then.

The implication is that the bitcoin system is not sustainable. Since what cannot go on will stop, one must conclude that the bitcoin system will inevitably collapse. The only question is when.

I could go on at length about how this centralizing tendency will eventually destroy every single component of the bitcoin value proposition, knocking them down like a row of dominos: the first domino to fall will be distributed trust, Bitcoin’s most notable attraction; the system will then come to depend on trust in the dominant player not to abuse its power.

This player will become a point of failure for the system as a whole, so the “no single point of failure” feature of the system will also disappear. Then pseudo-anonymity will go, as the dominant player will be forced to impose the usual anti-anonymity regulations justified as means to stop money laundering and such like, but which are really intended to destroy financial privacy.

Even the bitcoin protocol, the constitution of the system, will eventually be subverted. Every component of the bitcoin value proposition will be destroyed. The bitcoin system will then become a house of cards: there will be nothing left within the system to maintain confidence in the system.

An Inferior Product Cannot Survive

There is also the argument that the price of bitcoin must go to zero because an inferior product cannot survive long-term in the absence of regulatory barriers to entry.

Imagine you have a market with no entry barriers. The first firm to enter the market has 100 percent of the market share, as bitcoin once did. Competitors then come along and make inroads into the market.

Some of these offer products that are superior to the product produced by the first firm, not least because their producers have learned from some of the design flaws in the first firm’s product. And eventually superior rivals displace it completely and the market share of the first product goes to zero.

There is some evidence to suggest that this process is at work in the bitcoin market: according to CoinMarketCap, bitcoin’s share of the cryptocurrency market had fallen to 94.29 percent by April 28, 2013 (the first date for which they provide data) to 52.29 percent by today.

This fall has not been uniform – we would not expect that – but the direction of travel is clear: bitcoin is losing its market share. Whether its market share will continue this downward trend and gradually fade out or suddenly go pop is another issue. I suspect the end will come when something triggers a selloff that leads the Bitcoin price to fall its natural long-run level, zero.

The history of innovation also supports my belief that bitcoin cannot last indefinitely.

The innovators – the early movers in a market – rarely survive long-term under conditions of free entry. An example is the Ford Model T. This automobile was first produced in 1908 and soon came to dominate the market. But competitors learned from its design flaws and built better cars, which eventually stole its market share. The Ford Model T now survives only as an antique.

The difference between the Ford Model T and bitcoin, however, is that bitcoin has no antique value. Do I still think that bitcoin will bite the dust? You bet.

27. 12/01/2019 20:19
Web 3.0’s Crypto Winter Mission: Keep Our Heads Above the Hype

The past year has seen an onslaught of doom-and-gloom narratives shower down on our fledgling movement, in stark contrast to the inflated hype cycle we swam through the year before. I am here to report that this year has, in fact, been a tremendously productive one for the teams hard at work building the decentralized web’s core infrastructure.

We are far from drowning in the expectations that were set 2017 – rather, we have a found refreshing calm and focus in the storm many have dubbed “Crypto Winter.”

When Gavin Wood and I left the Ethereum Foundation to co-found Parity Technologies just three years ago, we knew that the path forward would likely provide a bit of a wild ride. We had already been through the waves of speculation that surrounded our work ensuring Ethereum’s launch and knew that as the spotlight brightened, these tidal hype surges would likely become more dramatic. We took the opportunity to build Parity Ethereum in 2015 while global enthusiasm was waning and delivered the fastest and most secure software for Ethereum, helping support the next phase of intense public interest with strong, proven technology.

We find ourselves in a very similar position today at the end of 2018.

Huge strides have been made in the development of the technology that supports innovation of a better web and more reliable institutions. This is where the focus should be.

This crypto winter we put everything we have learned building Ethereum, bitcoin, Polkadot and application-specific blockchain implementations into Substrate — a free, open-source blockchain development framework.

Now, even developers new to decentralized Web3 infrastructure will be able to spin up their own blockchains, networks and services in just minutes or days. Projects using Substrate will be able to freely access the same state-of-the-art tech stack we are using to build the interoperability network Polkadot for the Web3 Foundation and Parity Ethereum 2.0 (Serenity) with support from the Ethereum Foundation.

This is the sort of core infrastructure that helped support the last swell of development and innovation, and it will go a long way towards bolstering the next one.

Wider progress

The chill has also fared well for many of the projects and teams we work together with closely.

For instance, great progress has been made in our ongoing collaboration with Protocol Labs to develop and implement the LibP2P network stack, a key piece of networking technology that we will be using in Substrate, Polkadot and Ethereum 2.0. Melonport, the first decentralized protocol for asset management, launched this February.

The World Food Program’s Building Blocks project, which we built with the U.N. using Parity Ethereum, started to scale up and will be tested across more of the U.N.’s various divisions, as the WFP’s project has proven to save on upfront costs as well as 1.5-3 percent per transaction on the ground.

The program will have helped feed over 500,000 refugees by the end of the year at a lower cost, allowing funding to reach deeper into impacted areas. And finally, Zcash successfully pushed the Sapling network upgrade this year, greatly improving the prospects for improved user privacy in a Web3 future.

We are excited to start work on a Parity Zcash node this year in partnership with the Zcash Foundation.

The next year will see major network launches and upgrades from Tezos, Ethereum, Polkadot, and more – all united in a common vision to put the internet back into the hands of its users. The core teams building these networks are all growing rapidly – Parity doubled in size this year and we plan to double in size again next year. The Web3 Foundation will also continue hiring into the next year along with many of the teams listed here.

Our builder’s view on how much progress we have made towards this vision was crystalized at Web3 Summit at the end of the year, where the teams mentioned above and more came together for three vibrant days in Berlin. There was no sense of worry about markets or talk about where prices were going to go, just a clear focus on the task at hand and the work that needed to be done to accomplish it.

The time is now

We have also seen a great deal of reinforcement for the necessity of Web3 over the past year. This movement has seen this before and know that as history evolves, the implications of a truly peer-to-peer internet will become larger.

I strongly believe that 2018 will go down as a pivotal point in the growth and maturity of the Web3 movement:

The next year is a promising one, and I hope you see the light through the storm as I do.

Despite the deflated narrative we have weathered over the past year, this time was by no means wasted. Those building this future decentralized internet have been hard at work.

28. 11/01/2019 09:56
Bitcoin Price Slips Below $3.8K as Bullish Bets Tank

Bitcoin is losing altitude as an unwinding of bullish bets is creating downward pressure on prices.

As of writing, BTC is changing hands at $3,780 on Bitstamp – down 5 percent on a 24-hour basis – having found offers above $4,000 at 06:00 UTC.

Notably, the price drop is accompanied by a decline in the bullish bets. For instance, the BTC/USD long positions on the Bitfinex exchange fell to an eight-day low of 31,237 earlier today and are currently down 8 percent at 31,255 – the biggest single-day drop since Dec. 19.

Further, the long-short ratio has pulled back to 1.35 from the five-month high of 1.5 reached yesterday, indicating waning bullish sentiment.

What’s more interesting is that the “long squeeze” comes after repeated failure on the part of the bulls to clear the key resistance above $4,100. So, it seems safe to say that the demoralized bulls are exiting the market and that could attract sellers.

BTC/USD longs and shorts

As seen above, long positions have dropped sharply, while short positions are largely unchanged on the day. That said, today’s sell-off could entice the bears, leading to a rise in shorts and a deeper drop in prices.

Daily chart

The bearish doji reversal – back-to-back doji candles and a negative follow-through – seen in the above chart indicates that the recovery rally from the December low of $3,122 has stalled and the bears have regained some control.

Validating that argument is the breakdown of the trendline connecting the Dec. 28 low and Jan. 6 low. The 14-day relative strength index (RSI) is also rolling over in favor of the bears.

Moreover, the failure on the part of the bulls to force an inverse head-and-shoulders breakout could be considered a strong bearish signal, especially since the bull flag breakout, witnessed in the 4-hour chart earlier this week, had set the stage for a break above $4,300.

As a result, BTC risks falling to the major support lined up at $3,566 (Dec. 27 low).

4-hour chart

With prices trading well below $3,934 (flag low), the bullish view put forward by the bull flag breakout on the 4-hour chart earlier this week is no longer valid.

View

  • The bearish doji reversal seen in the daily chart indicates an end of the recovery rally and has likely opened the doors to the bullish-higher low of $3,566 (Dec. 27 low). A break below that level would further strengthen the bear grip and allow a re-test of the December low of $3,122.
  • The confluence of the inverse head-and-shoulders neckline and the 50-day EMA, currently at $4,120, is the level to beat for the bulls.  A high-volume break above that level would open up upside towards $5,000.
29. 10/01/2019 12:18
Bullish Sentiment for Bitcoin Is at a 5-Month High

The ratio of long-to-short positions placed on bitcoin (BTC) has reached its highest level in over five months on cryptocurrency exchange Bitfinex.

At press time, the BTC long positions placed on the exchange total 33,750 units, worth $137.3 million at current market prices, whereas the number of short positions is roughly 11,000 units less at just 22,787 – now worth just under $93 million.

This creates the long-to-short ratio of nearly 1.5:1 – its highest since August 6th of last year.

Bitcoin longs and shorts (Bitfinex)

The drop in short positions is not exactly surprising, considering the price of bitcoin fell roughly 50 percent between Nov. 14 and Dec. 14, giving traders ample time to lock in profits while awaiting further opportunities.

A bullish technical reversal pattern known as the “inverse head and shoulders” pattern is also evident on the bitcoin’s price chart, which may be playing another factor in scaring bears out of the market for now.

Although the long/short ratio being at multi-month highs may seem encouraging for bitcoin bulls, the market will likely witness another sharp decline if key support near $3,200 is breached, as it would signal the latest corrective bounce to nearly $4,400 has ended.

This would put the market at risk of experiencing a “long squeeze” or rapid closure of long positions, which could have a rapid and bearish effect on the price of bitcoin since the only way to terminate a long position is to sell back the longed BTC.

Disclosure: The author holds BTC, AST, REQ, OMG, FUEL, 1st and AMP at the time of writing.

30. 08/01/2019 08:42
Coinbase Suspends Ethereum Classic After Blockchain History Rewrites

Crypto exchange Coinbase has halted all ethereum classic transactions, withdrawals and deposits due to a series of blockchain history reorganizations on the network.

Ethereum classic saw more than 100 blocks “reorganized” during a potential 51 percent attack late Sunday, according to at least two different block explorers – Bitfly (Etherchain) and Blockscout. Coinbase said in its blog post that it detected some 88,500 ETC being double-spent (totaling some $460,000).

Media publication Coinness reported Monday that an in-house analyst had detected an abnormal hash rate (or computation energy) going into a single mining pool, potentially causing mass reorganizations (reorgs) of mined blocks. Though initially refuted by the core proponents behind ethereum classic on Twitter, the official account has now affirmed potential cause for concern, tweeting out:

“We are now working with Slow Mist and many others in the crypto community. We recommend exchanges and pool significantly increase confirmation times.”

SlowMist, a China-based security firm, first alerted users of the strange activity occurring on the network Monday morning, stating that its team was trying to trace the cause of the attack. SlowMist did not immediately respond to a request for comment.

Recent reports from Coinness stated that “certain abnormality” had been detected in the mining hash rate of a private ethereum classic mining pool.

Disputed accounts

The duration of the attack seems to be in dispute. Blockscout reported block reorganizations occurring at 02:00 UTC and 05:00 UTC Monday, while Bitfly said in a Tweet at 17:00 UTC that the attack was potentially “ongoing.” In its note, Coinbase wrote that “the attacks are ongoing.”

Blockscout project lead Andrew Cravenho affirmed to CoinDesk that although the last recorded reorg attack was seen 14 hours ago, the network is constantly “fluctuating and people are always switching their hashing power,” suggesting the potential for continued disruption under “the perfect circumstances.”

He also noted that the reorg may have begun before being noted on Blockscout. In a blog post, Coinbase said it first noticed the reorg on Jan. 5, two days before other reports began.

And though reiterating to CoinDesk that indeed “a huge reorg took place” on the ethereum classic blockchain, Cravenho’s explanation of the event as a 51 percent attack is not widely agreed upon.

In an email to CoinDesk, ethereum classic dev advisor Cody Burns said that the activity could not be labeled a 51 percent attack but rather “a selfish mining attack” caused by a client-local phenomenon.

He added in a post on Twitter that “…the entire Ethereum network doesn’t ‘reorganize’ simultaneously. It would be more likely that someone discovered all of Coinbase ETC nodes and ‘surrounded’ them.”

Still, Burns suggested in an email to CoinDesk that regardless of the situation’s origin, companies providing services for ethereum classic should take steps to protect their users.

“The best course of action is for businesses and exchanges using ANY ethereum based chain is to increase the number of confirmation blocks to >400 blocks,” he wrote.

In response to the deep reorg, Kraken announced in an incident report that it was increasing the number of confirmations required to make an ethereum classic deposit. Bitfly told CoinDesk that it was likewise taking this action.

Poloniex announced it was disabling ETC wallets, and it does not currently have a firm timeline on when they will be re-enabled.

Responsibility

The ethereum classic Twitter account claimed that the excessive hashrate may have come from crypto miner manufacturer Linzhi, which reportedly confirmed it was testing new machines with a 1,400Mh/s hashrate.

However, in an email to CoinDesk, Linzhi Shenzhen director of operations Wolfgang Spraul pushed back, saying “We are categorically denying such claims, they are entirely baseless and may be part of the attack itself.”

The company has not yet launched its first product, he said, adding:

“If we would test our ASICs, we would never do that on any mainnet, we would do that on a testnet or a private net. We would most likely invite independent industry figures like David Vorick or Anthony Lusardi to observe what we are doing.”

 

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