The 21mm BTC Soft Cap

Is this thing still on?

Hope everyone is having a great summer! I’m coming off my longest stretch without a post since I started blogging, and feeling refreshed…if a little rusty. For those of you who rely on me for daily news blurbs and have been disappointed with the trickle of recent posts, mea culpa. But you can always join the other 8,600 peeps on twitter who get those links every day even when I don’t crank out a post. Consider the numerous blurbs below a summary of all that mattered in July.

Otherwise, allow me to get back to action today with an unintentionally controversial post…


In case you missed it, I did a tweet storm on Friday regarding the 21 million bitcoin “hard cap” that is programmed into the protocol. The short summary is that I don’t think this hard cap is very hard at all, and the bitcoin community should start mentally preparing themselves for an inevitable, and I think positive, modification of bitcoin’s inflation schedule.

As I explained on Friday, there is exactly one thing I am certain of when it comes to bitcoin mining: it will look markedly different in five years than it does today. Forget the oddity of industrial hashing centers for a second. (That’s fodder for another post.) I do not think a new global financial system will be built around a currency which could be perpetually controlled by ~100 private individuals. And I do not think that we’ll be better off replacing coinbase rewards with transaction fees after 1–2 more halving events. With both of those assumptions in mind, bitcoin will probably only remain the industry’s standard blockchain if and only if the mining schedule is modified to include a permanent 1–2% inflation rate.

And just like that, people lost their f’ing minds.

Let’s start with the wealth concentration issue (my weak argument). I jotted down the names of ten known people and companies that own some of the largest bitcoin positions, just to see how bad concentration really is. Using assumptions from publicly available sources (news, books on the subject, etc.) and private intel (relationships, confidential info), I believe those ten parties control 20–25% of the current bitcoin money supply — that includes US investors, Satoshi and known miners (21/KnC/BitFury). When you factor in unknown entities and individuals, and the *massive* Chinese miners and speculators that are also invested in the market, wealth concentration looks even worse. In fact, I would venture to guess that centralization has gotten worse rather than better, since the highs in 2013.

Imagine that: a technology and currency that ostensibly caters largely to “the other six billion” underbanked people in the world suffers from an aristocracy problem.

Now I know that centralization will decrease over time. Current holders will get diluted by a third as the remaining seven million bitcoins are mined. And as bitcoin appreciates in value, early investors will likely reduce their positions and lock in gains. So even those who could temporarily tank the market with large sell orders (intentionally or otherwise, read: Bearwhale) will probably be held at bay, and their power to truly manipulate market pricing is limited. (Wealth concentration isn’t really a risk to new long-term investors, but it does ensure that it will be take many, many years and probably several unmitigated wipeouts of derivatives markets before a healthy infrastructure can emerge.)

It seems a bit perverse that 100 private capitalists could reap enormous gains in the event that the currency become a developing economy reserve, but there’s nothing unique or inherently wrong about that dynamic. Without speculators, bitcoin won’t hit the critical market cap and liquidity it needs to emerge as a truly viable reserve. So again, the wealth concentration issue is just the weak argument for adding low inflation to bitcoin (to gradually dilute down the largest holders). It’s not an industry killer, but the optics probably suck enough to significantly constrain growth.

This would be ok, I think, if we believed that the bitcoin blockchain would remain secure over time during the transition to a fee-based market. My hunch is that it won’t, and contrary assumptions are incredibly risky. r/bitcoin user BobAlison actually helped frame the issue best:

“In the not-too-distant future Bitcoin users may be presented with a choice: follow an altcoin hard forked from Bitcoin that raises the 21M cap or stay with Bitcoin. Before dismissing this as impossible, consider that the conditions at that point may be very different from what they are now. Consider a scenario in which, for whatever reason, Bitcoin is under constant attack because it has become more profitable to attack than to mine. Maybe the transaction fees aren’t nearly enough to to compensate for cuts to the block reward. Maybe after the 2020 halving, for example. At that point we’d have two very unpleasant choices to pick from. Suffer through a wave of double spends and other nonsense, or increase the block subsidy. Things could start off innocently enough. Rather than inflating over all time, we could pay out the total sooner. The reward would increase in the short term, but the last reward would be paid out sooner. Should that approach fail, the choice might be to stand idly by while the network is destroyed, or do something about it.

And that something may well be to raise the 21 M cap.”


One of the primary untested assumptions confronting the industry is that this anticipated fee-based mining incentive can work at scale. At best, that will mean that we probably end up with a network that is more expensive than existing card networks and money transfer options. At worst, that will mean that the network is constantly threatened by double spending attacks, undermining confidence in the entire bitcoin technology stack that is being built out today.

People often forget that bitcoin’s “inflation subsidy” is currently 9–10%. Can we at least see what happens to the mining industry after the 2016 halving event before dismissing calls for long-term low inflation? Will transaction fees start to tick up once we’re down to a 4% inflation subsidy in 2016? Or will that only happen at 2% in 2020? 1%? Whenever we see transaction fees start to tick up, I think more people will start to wonder why we’re adding an avoidable risk to the network — in terms of its security, competitiveness, etc. — when a superior low-cost option (adding permanent low inflation) is available.

The strong argument, then, for lifting the bitcoin cap is that it partially negates the risk of transitioning from subsidies to fee-based incentives, helps maintain the bitcoin blockchain’s security without pricing out certain smaller transactions, and allows the network to triangulate on a sustainable inflation rate.

That last point is very important. Some people have accused me of advocating for theft, and they’ve said that inflation is a slippery slope. After all, they ask, what keeps the miners from pushing for a perpetual inflation rate or 5% or 10% or even more?!

Quite simply: competition!

I don’t understand why so many hard cap fundamentalists remain adamant that bitcoin absolutely must remain fixed and deflationary in order to be a good store of value. It’s simply not true. All bitcoin really needs to do is remain less inflationary that its fiat brethren and stored value competitors. The network could reach consensus on an inflation rate that is just below the next strongest reserve currency’s, and bitcoin would win. The network could reach consensus on an inflation rate that is just below the annual mining output of the gold industry (1.5% over the past 10 years, by the way), and bitcoin would win. And in the process, these subsidies would guarantee that bitcoin would always win as a payment rail over centralized competitors like correspondent banks and card networks, because transaction fees could remain trivial.

In fact, I’d even suggest that we need to add bitcoin inflation just to keep the money supply stable. Bitcoins will be lost and burned over time; should that portion of the money supply just disappear without replenishment?

The other predictable reactions from many in the community when you bring up an adjustment to the hard cap is that “you should just leave if you don’t like the current rules” (“No.”), or that if these rules change, they will immediately sell their bitcoin (presumably in exchange for higher inflation gold or dollars?) or move to a hard cap bitcoin fork.

I say good riddance. A hard cap fork would be significantly smaller and more insular than the eventual low-inflation fork even if it took a sizable minority of the early bitcoin community with it.

Consider that at a 2% inflation subsidy, the ownership by long-term holders only gets diluted by half every ~35 years. If you think that a low inflation rate and its benefits (outlined above) will lead to just twice as many bitcoin users and investment (when in reality the true impact will likely be measured in orders of magnitude), the net effect on your wealth is zero. We’ve never seen a fixed supply currency, bootstrapped from nothing, with a population of users that was expected to increase exponentially throughout its formative years. So it would appear that no early adopter in his right mind would even remotely worry about the impact of a 2% inflation rate as long as interest in bitcoin is growing 10–100x faster.

I’m not saying that this will absolutely play out as I envision. There is wayyyy too much uncertainty over whether bitcoin itself will even exist as the dominant digital currency in 10 years. But if bitcoin is thriving, I don’t see any chance that the hard cap fork survives as the most dominant blockchain. The hard cap purists are free to ignore this or to criticize me for saying so, but their fork of bitcoin will probably be a niche, also-ran fork of bitcoin. They will be forced to watch as a more secure, more equitable, more widely embraced, low-inflation fork emerges victorious.

And yes, that’s probably a good thing.

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Today’s Tid Bits

U.K. Is Leading the Way to Become a Global Bitcoin Hub
British Prime Minister David Cameron brought along Bitcoin company Blockchain amongst several others to a trade mission in South East Asia. This move is a favorable step for the industry as it suggests that the UK government wants the country to become a promising Bitcoin hub for future startups. Previously the Bank of England has also addressed Bitcoin positively stating that the blockchain technology has considerable promise. London based Blockchain has 4 million users and raised $30 million in funding.

Revealing Bitcoin’s Legality: The ZapChain Summit
Online forum ZapChain is hosting a discussion surrounding Bitcoin in the media. Bitcoin has had multiple negative appearances in the media including the MtGox collapse, its association with Silk Road, and being used for illegal drug trafficking and weapon sales. The online discussion on ZapChain will help foster discussion about Bitcoin’s media presence as well as discuss the legalities of the currency, and how it can become a viable currency that is integrated into our society.

MtGox Bitcoin CEO is Facing Fresh Allegations That He Misused $8.9 million in Customer Funds
MtGox CEO Mark Karpeles is facing allegations that he misused and illegally spent deposits worth $8.9 million. Karples is denying all allegations, but Japanese authorities have the right to hold him in custody for 3 weeks to undergo interrogations. Investigators suspect that Karpeles knew about the missing Bitcoins in the MtGox collapse and that he transferred the coins into a separate account.

Ben Lawsky Rejects Conflict of Interest Accusations
Ben Lawsky is denying any conflict of interest accusations made against him and his new digital currency consultancy firm. The accusations arose when Lawsky, lead architect of the Bitlicense, left the NYDFS to start his own consultancy practice. While accusations are still being made, Lawsky says that his integrity is being questioned and that these comments are false.

Bitcoin Is a Viable Digital Currency: Lee
In an interview with Bloomberg, BTC China CEO and Co-founder Bobby Lee speaks about Bitcoin’s viability as a digital asset. When asked about the negative press surrounding Bitcoin, including Mt. Gox, Lee noted that Bitcoin is not company but rather a brand that has an entire industry built off it. Lee also noted that subsiding volatility and increased regulation, especially in the US, will bring legitimacy to the currency despite setbacks including its use in illegal drug trade. Finally, Lee noted that blockchain technologies can disrupt a number of industries, including how traders secure an exchange of assets.

Bitnet and Zooz Enable Merchants to Accept Bitcoin
Enterprise Bitcoin payments processor Bitnet has partnered with payments provider Zooz to integrate Bitcoin payment options onto the Zooz platform. Zooz cited a growing consumer demand for Bitcoin payment options as the main driver of its decision to partner with Bitnet. Bitnet’s services will allow Zooz customers to accept Bitcoin without exposure to volatility or fraudulent transactions.

Blackhawk Network Shopper Study Finds 2015 is the Year of Traditional, Digital and Mobile Convergence in Payments
A poll that surveyed 1,000 US consumers found that while 180 respondents have used an alternative form of payment, such as Apple Pay or Bitcoin, in the last year, consumer sentiment toward bitcoin still remains mainly negative. The results showed that 38% of those surveyed labeled Bitcoin as the most inconvenient way to pay compared to cash, credit cards, and checks. However, old payment methods are slowly losing ground to new payment methods that are attractive to more tech driven consumers.

Godfather of Bitcoin Adam Back Explains How Blockchain Will Prevent Another Banking Crisis
According to Adam Back, Bitcoin and the blockchain can provide a real time audit check that will bring a level of trust to a financial system that’s trust capabilities are only as strong as the weakest link in place. This application can trickle down to even individual consumers as they can rely on a system of multi-signatures, private keys, and the blockchain to secure transactions rather than place trust with a custodian. The use of smart contracts, or transactions on the blockchain, can be leveraged to remove third party entities between transactions; however, this process cannot be reversed and transactions are final. Finally, Back explains that reducing our dependency on third party entities will allow us to avoid systemic risk similar to that of the 2008 financial crisis.

Wall Street’s Former Queen of Commodities Just Made Her Pitch for Why Bitcoin is the Future
Chief executive of Digital Asset Holdings Blythe Master believes Bitcoin and its technologies can make a lasting impact on the way traders exchange assets. While speaking at SourceMedia’s Convene conference, Blythe compared Bitcoin to the internet in the 90s and she noted that the currency must overcome regulatory hurdles and security issues for mass adoption.

Former Visa Senior VP Says Bitcoin is Probably the Biggest Fintech Innovation
Bitnet’s Founder John McDonnell believes that Bitcoin is the biggest fintech innovation since the creation of the electronic payment system. Bitcoin can bring our modern electronic payment system up to speed with other innovations as this area has seen little progress since the inception of credit cards. Bitcoin’s technology can create a more efficient way to pay for goods and come with cheaper fees compared to credit cards.

Former Obama Tech Advisor Explains How Bitcoin Could Transform Government (In 5 Quotes)
Former White House Senior Advisor and current MIT Media Labs director of digital currency believes Bitcoin can have great implications on government agencies. Bitcoin’s technology can improve human welfare by increasing the capacity to deliver services and secure property and identify rights. Forde also believes that Bitcoin is more than a currency and can have a great deal of applications built on top of its framework. Other benefits of the technology include bringing a modern banking system to millions who lack a bank account and adding solid security measures to areas such as user identification and security IDs.

NewsBTC to Provide Bitcoin News Services in Mexico
NewsBTC will expand its news services into Mexico amidst growing interest in the Bitcoin industry from readers in the country. Mexico is an attractive area to expand in for Bitcoin due to the large volume of remittances from people all over the world. Educating users on Bitcoin will allow them to leverage a new avenue to send money to and from the country, which is more cost effective than traditional methods of sending money.

Bitcoin Growing 25% Faster Than the Internet in its Early Years
Venture Capital investments in the Bitcoin industry have outpaced those of the early stages of the internet by 25%. Investments in the cryptocurrency space will continue to grow as the number is projected to be $786 million in 2015, including the largest investment in the space of $116 million raised by 21 Inc. If investments follow the same trajectory as the early internet, the industry can see almost $2 million invested in 2016.

Blockchain in the Corporate Environment Has Big Potential, But Faces Implementation Challenges
Two Managing Director’s at Accenture published a post that details how institutions can leverage the Blockchain technology to increase efficiencies in corporations and financial marketplaces. Blockchain tech can lead to a more powerful infrastructure in capital markets where billions of dollars in underlying assets are traded daily. However, the technology provides multiple security hazards due to its decentralized nature and it has a costly proof-of-work process. To gain traction with CIOs and CTOS, developers must introduce lower cost methods that guarantees security, privacy, and speed of proving each transaction.

Uber Drivers Get Creative to Accept Bitcoin Donations
While Uber currently does not accept Bitcoin payments, some drivers are posting their own wallet addresses for Bitcoin tips from riders. Uber’s payment system of debiting a user’s credit card after each ride does not integrate well with the Bitcoin network because as every transaction must be signed and verified by the user. There is not solution to automate this process as automatic payments by third party apps pose security threats. Although Uber drivers are not allowed to accept tips, this does not stop them from posting QR codes for Bitcoin donations.

5 Things Bitcoin Owners Must Do When Estate Planning
Licensed attorney and CPA Jeff Andrew laid out 5 steps Bitcoin owners should take when developing their estate plans. First, Bitcoin is labeled as property by the IRS, and when an owner dies the Bitcoin is taxed by fair market value when a transaction is made and not when the Bitcoin was acquired, which benefits those if the currency appreciates and hurts those when the currency depreciates. The second point mentioned was to make sure your family is aware that you own Bitcoin and that they have the appropriate keys to access the funds. Other points made include allowing your power of attorney access to Bitcoin and understanding the Prudent Investor Act, which forces some to diversify Bitcoin investments and sell off all holdings.

Mike Tyson Stepping Into the Bitcoin Ring
Mike Tyson is entering the Bitcoin industry by sponsoring a Bitcoin ATM that will launch in two Las Vegas locations. Tyson is bullish on the currency as he wishes to join the ‘Bitcoin revolution’ and gain access to financial freedom. The ATMs are set to release in August of this year.

The Crypto-Cold War: Bitcoin’s Politics of Scalability
The debate surrounding the eventual rise of the block size is still widely debated as there are conflicting opinions of how much to increase the size by. Those in favor of increasing the block size understand that by doing so allows for the ceiling to be raised on the adoption of Bitcoin and thus the currency is scalable for worldwide adoption. However, those against raising the limit argue that Bitcoin should not be used for regular purchases and instead by treated like a stock or a bond. To avoid a crypto-Fed type organization that governs the system, a compromise must be reached by key stakeholders that satisfies all parties involved.

CEX.IO Adds Deposit and Withdrawal Options via AstroPay, Enables Buying Bitcoin for Cash
Bitcoin exchange CEX.IO has partnered with payment provider AstroPay to bring an additional source to fund accounts and withdraw money. This new partnership enables customers to purchase Bitcoin by simple bank transfer or by using cash at one of the terminals. The service will have a 2.5% commission fee and will be extended to countries that AstroPay operates in including Brazil, Argentina, Chile, Columbia, Mexico, and Peru.

Reduced Trade Fees Coming August 1st!
Bitcoin trading platform Kraken has reduced its fees and will introduce a maker-taker model for its fee structure. The new model will provide a reduced market fee for market makers who add liquidity to the system, and also apply a taker fee for market takers who remove liquidity from the system. Both makes and takers benefit because of the overall lower fees and greater access to liquidity and tighter spreads. The new fee model will be active on August 1, 2015.

Bitspark Joins Accenture Asia-Pacific FinTech Innovation Lab
Bitcoin exchange Bitspark will join Accenture’s FinTech Innovation Lab Asia-Pacific 2015 as one of 7 startups to receive mentorships and support during the 12 week program. The Innovation Lab was launched in collaboration with various banks including Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, HSBC, and J.P. Morgan. The Innovation Lab is a great step forward for the FinTech industry as major financial institutions are looking to develop, and ultimately, invest in some of the rising players.

What Greece Can Learn From Bitcoin Adoption in Latin America

Bitcoin adoption in Latin America has outpaced growth in other prominent countries as Bitcoin transactions have increased 510% from 2014 to 2015. Argentinians are turning to Bitcoin as an inflation hedge against their local currency as the government has imposed several restricitons in holding their money in other international currencies. Greece can use the lessons learned in Argentina’s financial troubles and begin to adopt Bitcoin to solve the banking crisis reduce the impact capital controls has on the economy.

European Court of Justice Official Proposes Bitcoin VAT Exemption

The Advocate General of the European Court of Justice, Juliane Kokott, stated that Bitcoin operations should be exempt from a Value Added Tax, or VAT. Kokott argued that Bitcoin does not fit the parameters set forth by the VAT directive and therefore should not have a value added tax on transactions made with the currency. This publication follows other Bitcoin VAT exceptions in countries such as Belgium and Spain.

Bitnet Launches ‘Instant Approval’ Tool for Bitcoin Merchants
Bitnet has launched an Instant Approval service that allows merchants to instantly verify Bitcoin transactions without having to wait for them to be confirmed on the blockchain. Bitnet has integrated several risk mitigation measures including calculating the probability of whether a transaction will be confirmed and looking for any transaction or miner’s fees associated. While Bitnet will not deny transactions to the merchant, it will assume liability if the
transaction does not get confirmed.
Bitcoin Trends in the First Half of 2015
Coinbase published a report detailing Bitcoin trends for the first half of this year. One point noted that while Bitcoin price is down 9% YTD it is effecitvely up 213% in a two year time frame. In addition, several major exchanges have provided the safe and reliable ways to store and transact Bitcoin, which has helped garner a lot of attention from institutional investors and help reduce volaility. The company also believes that Bitcoin adoption will continue to increase as current problems in finance and security, such as the Greek debt crisis and multiple government data breaches, can be solved leveraging Bitcoin’s technology.
Investment Firm Wedbush Predicts $400 Bitcoin By 2016; Advises to Buy GBTC
Wedbush Securities believes investors should allocate money into Bitcoin as they beleve the price will trade at $400 by next year, and the currency can power up to 10% of online payments and 20% of global remittances by 2025. The company has also placed an outperform rating on GBTC with a $40 price target, The report details three varying predictions for bitcoin, including the PayPal outcome, Napster outcome, and Internet outcome, which with a .02% chance of the latter happening it will value bitcoin at $1 million.
Jersey City to Get N.J.’s First Bitcoin ATM
Bitcoin ATM company Kointron successfully installed its first Bitcoin ATM in a small business called Smoke Shop Jersey City. The ATM will charge users an 8 to 15% service fee, which 4% is taken by Kointron. The company aims to install another ATM in Hoboken and eventually expand into New York and other states.
Your Streaming Music Payments Are Going Where?
Paying out royalties from music streaming services such as Spotify or Pandora is a highly convoluted process that is inefficient and at times stops payments from ever reaching artists. However, a Spotify employee suggested utilizing the blockchain to keep a public tally of each transaction that takes place to ensure money is being sent to the right constitutes rather than through a pipeline where money is being paid out at multiple steps before ever reaching the artist. Several startups have begun exploring this idea and design and consulting firm IDEO is running an incubator for startups to utilize the blockchain in various industries including home buying, health, and music.
Intellectual Property Lawsuit Against Bitcoin Company Xapo’s CEO to Proceed
Identify theft protection company LifeLock is filing an intellectual property lawsuit against Wences Casares with the claim that he had created Xapo using LifeLock’s employees, facilities, computers, and money. Casares, who previously ran digital-wallet start up Lemon that was bought by LifeLock, claims that LifeLock originally had no interest in Lemon’s Bitcoin initiatives or assets, which he hopes will stand in court. Casares has until July 24th to reply to initial charges against him.
Regarding July 10th DDOS Attacks: Explanation, Resolution, and Compensaton
OkCoin withstood a DDOS attack from an anymous source who’s motive was to influence the price of Bitcoin on the exchange. The company detailed the process it took to defend against the attack, which included switching to a highly secure server. After the incident, OkCoin stated that it will invest in more counter DDOS and CC defense measures, as well as create a 2000 BTC compensation fund for those who had realized losses due to its services being down.
Bill & Melinda Gates Foundation Funds Bitsoko, Promotes Bitcoin Literacy in Kenya
Bitsoko, a Bitcoin wallet provider funded by the Bill & Melinda Gates foundation, will host a series of educational events in Kenya to educate start-ups and the community about Bitcoin and blockchain technology. The company was recently awarded a grant for $100,000 with an add-grant of $1,000,000 if its project is successful. The company allows users to send money from a smartphone for a 0.1% transaction fee, and the startup wishes to bring effective mobile payment and remittance solutions to Africa and promote other services that allow for a more modern banking solution.
Swift Offers Grant for Research Into the Blockchain in Securities Markets
The Swift Institute has issued a call for proposals for research into the development of blockchain technology to be used in securities markets. The institute is asking researches to answer various questions, such as what would be the impact on intermediaries in the securities transaction lifecycle given a blockchain implementation, and what technology requirements would be needed for global securities transactonsto be processed through the blockchain. The institute is offering a grant of 15,000 euros to engage in deeper research on the implementation of blockchain tech.
Coinsetter Releases Bitcoin Margin Trading and Shorting
Coinsetter has integrated margin trading services to all of its users, a service that was previously available to only select customers. All customers can trade with up to 5x leverage and post collateral of as low as 20% of the margin balance. Traders can have access of up to $25,000 in interest-free margin and utilize a very secure Bitcoin exchange.
How Future Bitcoin Can Prevent a Future Greece
Bitcoin is at an inflection point in its history, and while the currency cannot fix the many problems the Greek economy faces right now, it can provide an alternative form of currency that is more efficient some time in the near future. It is becoming a common theme that a large institution announces its interest in Bitcoin with regards to simplifying operations, ranging from UBS to Nasdaq. Bitcoin is becoming more than a currency as its underlying technology, the blockchain, can have countless applications built off of it, similar to that of the TCP/IP protocol of the Internet.
How Blockchain Tech Will Change Auditing for Good
Matthew Spoke, a senior consultant at Deloitte Canada , believes the blockchain can be applied to the auditing industry to increase operational efficiencies and reduce redundancies. Currently, auditors have the public’s trust that they will be accurate , and at times there are multiple auditors involved on both sides of the transaction when posting financial statements. However, utilizing the blockchain allows for irreversible and time stamped transactions that are agreed upon and verified, thus allowing for seemingly automated third party verification that ensures transactions are complete and accurate.
BitBeat: Bitcoin, the Euro, and Currency Crisis
The central factor that holds together the Euro and Bitcoin is trust, and without trust and faith in the system there is no viable currency. Bitcoin as a currency and technology is also enduring a trust issue. The system, although decentralized, must be oversaw by human eyes. Miners are consolidating or shutting down with increased expenses, and a group of individuals must decide to change the Bitcoin protocol to alter block size. Both examples remove a facet of the decentralized principle behind Bitcoin.

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