Everything Wrong With Bitcoin In 2019
By Eric Lamison-White on ALTCOIN MAGAZINE
This editorial was first published in Coinmonks, now re-syndicated with permission and discretion of the original author to reach wider audiences.
When you spend so much time defending bitcoin to an ignorant population it incorrectly makes people think you like bitcoin when there are really a lot of improvements to be made.
There are three types of ignorance to defend bitcoin against.
- People who seriously have no clue and are swayed by the media and their favorite politician about the mere concept of bitcoin. This exposure to bitcoin is almost universally negative.
- People who have a little bit of a clue, but view issues with any part of the ecosystem as an indictment of the entire bitcoin concept. (ie. blaming “bitcoin” when a poorly run private company operating an exchange gets hacked resulting in customers losing their bitcoin)
- People that view bitcoin in its current state, and don’t notice that it changes and improves because it is software.
Generally, with the first and second types, the infantile view of the world has to be dealt with very patiently without introducing nuance. This is where you say “Bitcoin is digital gold, has all the advantages of gold but is weightless, infinitely divisible without expensive machinery, portable globally”. But this post is about the third, where I point out frustrating things about using bitcoin and how it can improve. It is intentionally titled to get the attention of the first and second types, who would use this to confirm their ignorant beliefs that this whole insecure asset class is only for drug dealers and terrorists while informing the third type about where it's going. As the utility of bitcoin increases, all three types become users of this technology, or at least the third type expands dramatically, marginalizing the ignorant.
This passage is most narrowly tailored to bitcoin, and not the blockchain, crypto, and distributed ledger technology (DLT) space as a whole. There is significant overlap.
Everything Wrong With Bitcoin In 2019.
Account Types And Incompatibilities
It is 2019 and there are 7 distinct types of bitcoin addresses. This has been a long time coming. Bitcoin addresses are basically the way to recognize your account and someone else’s account. With at least 7 usable types of address, it is very complicated and ridiculous, that’s all you need to know and should probably skip this part. Instead of any uniformity, there are at least seven types, here they are in order of introduction:
- Version 1 bitcoin addresses. These start with number 1 and have a string of characters. My alias 1Blockologist is an homage to version 1 bitcoin addresses. Example 17AUsMvHWDdgjW6STqG1oFgfng5m47kDfz
- Multisig Bitcoin addresses using P2SH. These start with the number 3. These are joint accounts. One way that bitcoin ownership was made a lot more secure was that your computer could be hacked but the hacker couldn’t move the bitcoin because it needed the other account holder to authorize transactions too. You can have accounts that require 2 owners, or accounts that require 3 owners but only 2 needed to authorize a transaction, and more. Millennials killing the escrow industry 🥑. Programmable money, baby!
- Stealth Addresses. Rudimentary implementation of privacy that hides the sender, receiver and amount. Nobody uses this implementation, only Darkwallet back in 2013 did briefly. Had flaws given the linkability to prior transactions.
- Version 2 bitcoin addresses, Segwit version 1. These addresses also start with a 3. The purpose of Segwit version 1 is solely because the known and better Segwit version 2 (bech32) addresses aren’t recognized by all the bitcoin clients that use version 1 bitcoin addresses. You also can’t tell if an address is a P2SH Multisig address or a Segwit address until the owner spends money from it. 🤦🏽♂️ This was the same in 2016, 2017 and 2018. But a Segwit v1 address can also be a multisig address using P2WPKH, or something.
- Version 3 bitcoin addresses, Segwit version 2 (bech32). These addresses start with bc1 instead of a 1 or a 3. The gold standard of bitcoin addresses. They take up less space on the bitcoin transaction highway, allowing more transactions to go through, increasing bitcoin’s transaction speed. 1.4% of bitcoin is stored in this newfangled address at the time of publication.
- Lighting Network address. These aren’t even addresses anymore, but invoices. The same concept, you get the combination of letters and numbers, and you send a balance to it or receive from it. Requires the use of v2 or v3 bitcoin addresses to create a lightning network address. These increase bitcoin’s throughput exponentially, basically nullifying all critics of bitcoin’s slow transaction speed. In theory. These also introduce a new level of privacy because lighting transactions are not linked to prior transactions, there isn’t a record stored on-chain (but some service providers might keep records themselves).
- Because I probably missed one. There are several things coming down the pipeline, such as confidential transactions (CT), which will be a lot better than the prior implementation of stealth addresses.
But wait there’s more 😐 So the issue with all these accounts types at one point was something about forwarding and backward compatibility, meaning that if you had an account you wouldn’t be able to send/receive to 100% of users on the bitcoin network. It seems now that this was merely a correlation with the wallet software you happened to be used to store your bitcoin, which doesn’t make a real difference for the user experience, (but confusing af). A wallet developer focused on version 1 bitcoin accounts wouldn’t have implemented anything related to version 3 bech32 bitcoin accounts and vice versa. Electrum is one such wallet that always [unfortunately] leapfrogs technology-wise, implementing bech32 way back in 2016. They let users know it was better but gave really bad choices informing users that they’re basically not even using bitcoin at that point until everyone else catches up.
Good news in 2019 is that a lot of wallets and exchanges have caught up. Note that all of this stuff is at least 15 months behind schedule because the whole segwit concept caused a rift in the bitcoin community. Some features had to be removed to make segwit possible, so it took about 15 months for it to gain consensus and allow for new innovations that segwit enabled to happen. The Lightning Network, for example, was effectively not possible without the segwit technology being added to bitcoin first. For a completely different evolutionary path, you can check out Bitcoin Cash, and Bitcoin SV but ⚠️beware of clowns 🎈🤡
Back on the Bitcoin network, because nobody major uses bech32 addresses (type #5), and nobody major uses Lightning Network (type #6), bitcoin is stuck in time. The prevalence of version 1 bitcoin addresses (type #1) and segwit version 1 (type #4) directly contributes to bitcoin’s slow speed and horrible user experience.
Bitcoin has been the slowest cryptocurrency on the market for half of its lifespan now. Half of a decade. The slowest, least scalable one, and us crypto enthusiasts have to still convert the ignorant masses away from their total non-sequitur criticisms.
The US banking system is still way slower when transferring between banks or brokerage houses this still takes 2 to 3 business days. On the West Coast, where banks open at 9 am Pacific Time, there is only a 4-hour window, 5 days a week, for a costlier same-day bank transfer to occur. For the uninitiated, this complaint is about how Bitcoin transactions take 20 minutes on a good day, and transfers on some other blockchains and DLTs take about 1 minute pretty consistently.
The irony is that Bitcoin can be FASTER than competitors if Lightning Network was more prevalent.
Competing cryptocurrencies/blockchains/distributed ledger technologies such as Ethereum, Tron, EOS, Libra, etc would lose their underdog story if Bitcoin’s lightning network was further along.
Major exchanges such as Coinbase and Binance should all be operating Lightning Network payment channels for deposits and withdrawals. They should have the option to — or force users to — use the Lightning Network. Onchain transactions would simply be lightning payment channels opening and closing, with no real transaction information visible. This could decrease their compliance burden with governments around the world that just figured out how to analyze a blockchain, the mass surveillance power would be removed from governments and its back to actually issuing warrants and subpoenas for old fashioned detective work.
But the lightning network software isn’t ready. Currently, users need to have downloaded the entire Bitcoin blockchain which is 220 Gigabytes and growing, keep up with all new transactions using their fast internet, then they ALSO have to maintain 100% uptime to keep their lightning payment channel open for some reason. That’s dumb. A solution called Watchtowers are coming, which lets a third party keep a payment channel open for you. In the meantime, you can buy a $300 computer built for this specific purpose.🤮 Let’s check back next year!
A big part of the value proposition of distributed ledger technology — which blockchains are the majority of, of which Bitcoin is the first blockchain — is the ability to move representations of ALL assets and contracts to them. This will create infallible records that don’t require the trust of fragmented antiquated municipal governments, many industries, industry regulators, and simultaneously unclogs the courts needed to enforce all of this. All that infrastructure will be unnecessary.
Bitcoin has had the ability to do rudimentary versions of this since 2013, with both the issuance of assets and contracts. Assets representing shares of companies, fine art, marriage unions, and limited-run products have all been stored on the bitcoin ledger.
The OMNI protocol is the primary software allowing people to do this. Right now, if you wanted to offer shares of your company without consulting any costly legal, CPAs or making a costly application to list on the NASDAQ just so people could trade your shares seamlessly, you can on the Bitcoin network using the OMNI protocol.
It's just that every other competing blockchain can also do this now, for much faster, much cheaper, and has extremely robust infrastructure available for trading these assets. So even if this whole concept is new to YOU, many organizations have already migrated to better blockchains or skipped bitcoin entirely. Tether has been in the news a lot with New York state regulators, and it is an asset issued on the OMNI protocol.
Bitcoin is slow af, expensive af, and issuing assets on the OMNI protocol is even slower and more expensive.
But OMNI hasn’t even kept up with the changes in Bitcoin! 👎 Check this out, OMNI assets can only be held in version 1 bitcoin addresses (type #1) and can only be used with P2SH multisig addresses (type #2) in some circumstances? Basically, no batch transactions are possible, which means using 1 transaction to send to many recipients at once. Directly contributing to Bitcoin’s slow max transaction speed and congestion, with Tether transactions being the primary or only asset using Bitcoin.
Even Tether is trying to migrate to other blockchains as fast as possible, with mirrored Tether issued on the Ethereum blockchain and the Tron blockchain. In their haste, they accidentally created 5 BILLION $ worth of Tether on the Tron blockchain, when they really only meant 50 million. (the excess was promptly burned transparently and doesn’t exist anymore)
So even though the Bitcoin Lightning Network is currently faster than ALL of these competing blockchains, no OMNI assets can be sent through it! 😅😅😅
This could possibly be an irreconcilable limitation of bitcoin. But it depends on what the OMNI developers think and prioritize, and good luck figuring that out!
Every bitcoin transaction is simply an entry to a database, which we call a blockchain in this context. Each entry has a little room for extra metadata aside from “amount” “sender” “receiver”. Every innovation past Bitcoin address version 1 uses this extra room in a transaction to enable joint accounts, lightning network payment channels, OMNI asset creation and sending, marriage and derivatives contracts and WHATEVER YOU CAN THINK OF! As long as the information fits in this extra room in a human or machine-readable format. But thats the thing, you probably can’t fit both OMNI/Joint Accounts/Lightning Payment channels/multiple recipients all in the same extra space. So its one or the other. Increasing the extra space simply means the 220 gigabyte blockchain increases in size faster, so for the people that have to store the blockchain (miners, lightning network masochists), they won’t upgrade their software to a version that has a bigger transaction size, and bitcoin only works if the majority of the participants use compatible software. Get it?
So OMNI assets can’t get better or faster and likely can’t be transmitted over the lightning network in 2019 or maybe ever. I think I saw someone do it on youtube once though, with the caveat that you might accidentally delete your asset. Just bitcoin things 🌈
Hey, these have actually gotten a lot better!
First of all, you aren’t supposed to be storing your bitcoin on exchanges. Its 2019 and people still do that and get surprised when the exchange gets hacked, is inherently malicious, or is an incompetent private company. Something happens that prevents you from keeping access to your digital assets.
The way to use exchanges and own bitcoin is counterintuitive for bitcoin traders and enthusiasts so let's try to visualize the difference compared to other financial institutions.
How you use your bank account: Deposit $ -> Withdraw $ -> to your personal wallet.
How you use your stock trading account: Deposit $ -> Buy stocks -> log out and walk away. Or Sell Stocks -> Withdraw $ -> log out and walk away.
How you SHOULD use your bitcoin exchange account: Deposit $ -> Buy Bitcoin -> Withdraw Bitcoin -> bitcoin in your personal wallet. Or Deposit Bitcoin -> Sell Bitcoin -> Withdraw $ to your personal bank account
But instead, people treat their bitcoin exchange account like their stock trading account. They Deposit $, Buy Bitcoin and log out. The exchange gets hacked and everything they left in it gets stolen. Boohoo dumbass. If it's not in your personal wallet it is not your bitcoin. Colloquially this is said as “not your keys not your bitcoin”. No sympathy from me here, and currently no regulator to reimburse you.
What has improved is that more exchanges at least use the multisig technology. In this case, client funds are stored in joint accounts so when the hacker breaches the system, they still need to hack multiple executives and third parties at the same time in order to transfer the bitcoin away to an unknown address.
Also, some exchanges have private insurance now, alongside a variety of other methods to bailout or bailin customers. But only a few of the market-leading exchanges have this. And there are now more exchanges than ever that don’t but are systemically irrelevant.
Although there is now at least a few places that give customers some modicum of confidence they’ll have access to their money, it is still amateur hour every hour 🤹♀️
In 2019, there are still basically no brokers. The exchanges are still distinct from traditional exchanges, in that they offer retail customers direct market access. There are still no shared liquidity pools available to retail traders which allow customers to match orders placed on different exchanges. And the fees don’t reward liquidity makers.
But you know the craziest thing? All these features are all there! The mass proliferation of exchanges is because there are shovel selling technology vendors that have exchanges you can spin up for a few thousand dollars! These things are SOPHISTICATED. I’ve been on several sales calls over the last year where I’m being told how different this exchange software is from their sole and direct competitor 🙄. So all exchanges just license this software and skin it, and have the following features: subaccounts, brokerage capabilities, shared liquidity pools using FIX protocols, WebSockets, REST, you name it. It’s seriously pretty advanced but no exchanges enable these features, you know why? Greed 😃! It is really shortsighted 🤓, but who knows how long the party will last for these guys so I get it. Frustrating though.
Exchanges overcharge customers for withdrawals, overcharge for listing additional digital assets, overcharge for making services, overcharge customers on commissions, and more. Most of that wasn’t applicable to bitcoin, but this is the exchange business plan. They could gain so much MORE business if they gave rebates to liquidity makers and only charged liquidity takers. It would make creating liquidity its own business plan and people would compete.
They’re getting better though, let us check back next year!
Privacy And Best Practices
Bitcoin is not inherently private or anonymous. But you can use it that way. There are a lot of things you can do which will thwart the “chain analysis” that governments are tripping over themselves to learn. Oh yeah, selling chain analysis techniques to governments is extremely lucrative — if you are criticizing everything crypto while working for the silliest “Uber of Adtech Retargeting” startup known to man, you’re really missing how this parallel economy works. (Looking at you Hackernews.)
Even without consciously trying to hide from governments, the best practices of using Bitcoin greatly improve privacy. Specifically: NOT👏REUSING👏ADDRESSES👏👏
So we’ve already established that you should be using your own personal wallet not using an exchange. A wallet comes with INFINITE addresses, so basically, every time you accept a payment, you should tell the sender a completely new unused address.
Here is a little factoid: the blockchain doesn’t know any addresses, addresses only appear the first time when a transaction sends to it. So when you tell someone a new address, there is no link to you or anything else. The links primarily come from having multiple parties send to the address, and you send from that address to multiple parties. This fingerprints you. It adds confidence to chain analysis that all of the “to” and “from” services are your accounts at exchanges.
But how does Bitcoin still suck at this in 2019?
Sure, well the users suck at this, you suck at this, you don’t even care. But even if you did care, the wallets actively work against you!
Bitcoin wallets routinely combine balances in all of your wallet’s addresses when you ask the wallet to send any amount. Let us say you have 3 addresses, one with 1 bitcoin in it, one with 5 bitcoin in it, and one with 2 bitcoin in it. You go into your wallet app and try to send 4 bitcoin. Most likely, your wallet app will make a combined transaction from the address with 1 bitcoin and the address with 5 bitcoin in it, resulting in 0 bitcoin left in the first address and 1 bitcoin left in the second. Now, on the blockchain and to the recipient, both of those addresses are linked to you. All transaction from the first address is now linked to you. Very few wallets let you select the specific address and say “send 4 bitcoin FROM this address with 5 bitcoin, ignoring the other ones”. Electrum lets you do it, but even they have removed that feature sometimes before restoring it. The wallets actively work against you. 🤦🏽♂️
Oh but privacy on bitcoin is making a resurgence. 2019’s biggest bitcoin meme is Samurai Wallet and Wasabi Wallet, its so private and mixes all your transaction, replacing the resulting bitcoin you own with other people’s mixed bitcoin. It's hella dumb though because mixing in bitcoin, especially using Samurai Wallet or Wasabi, means multiple on-chain transactions and high fees and not even being able to spend your bitcoin until this is all done. Oh but wait yes it is quite a bit more private. There are also more private, faster, alternatives on the market because bitcoin has been stuck in time for 5 years. And by alternatives I just mean Monero. Additional alternatives are hot on its heels though.
One improvement is that Lighting Network payment channels can sufficiently unlink transactions too. Here ye here ye money launderers, chain analysis is dead 🙄 (still sell this service to governments though, they’re kind of slow to catch on 🥴) Basically you can open lighting network payment channels with other addresses you have in other wallets, and unlink/clean bitcoin through that, before further reintegration into the economy. I’m kidding about the money laundering part, money laundering requires that the source of money was illicit, and it is up to the accuser to prove that, so if you can never figure out what the source was then it’s not money laundering. 🥁🎉 There are plenty of reasons to obfuscating the origin of funds, and doing so isn’t a sanctioned activity despite the successful cultural vilification of financial privacy and having money to move around, to begin with. Mass surveillance through chain analysis is lazy, forcing law enforcement to revert back to old fashioned detective work with subpoenas and warrants, just like what would be done to follow transactions across banks. If you are just catching up, this is where the transparent public bitcoin blockchain comes in, all transactions are public when transactions are done “on-chain”, you can view the balance and transaction history of every account and the balance and transaction history of whoever sent funds to that account. Although you do not know the identity of those senders, you can infer a lot so it is very not private, and lightning network changes that.
In the future, Bitcoin is expected to have Confidential Transactions, putting it basically on par with Monero. Some of the bitcoin core development team also works on Monero, and vice versa at this point. Typically government action accelerates these improvements, also called a “flight to fungibility” by me exclusively.
Atomic swaps to other public opaque blockchains are pretty robust in 2019. At any given point in time, you can atomically swap around $500,000 worth of Bitcoin to Monero at a good price on Bisq, unlinking your transaction history for all intents and purposes. There is no private company to subpoena with atomic swaps. The fungible entries and exits available to bitcoin users change a lot, but I expect these to improve a lot more. With patience, you can unlink or “clean” millions of dollars of bitcoin over the course of a few days with ease. Governments should probably just stop using taxpayer resources on whitelisting transactions? It is easy to make everything look clean and easy to sell chain analysis software to governments that let them feel like they have power. The dangerous activities that governments want to make sure aren’t being funded really just are not that expensive to conduct, so when HSBC and Danske Bank and Deutsche Bank have laundered hundreds of billions in $ and €, it is more likely that there is mutual cooperation with everyone on the planet already.
Verdict: the wallets to use and store bitcoin suck, the technology itself is great. If you know how to use bitcoin raw without pretty buttons telling you what to do, the privacy is better than it appears.
Mining Energy Use, Environmental Impact
Maintaining the Bitcoin is a resource intensive operation and highly competitive capital intensive business model. Beyond that, the environmental concern is heavily misreported. Bitcoin mining is used to ensure that transactions get from one place to another, and is also subsidized by new bitcoin in diminishing quantities called the block reward. This is very lucrative, and therefore very competitive. The only way to make a profit is to have very low energy costs with very powerful computers, and so mining operations gravitate towards renewable energy sources or with boutique deals to use excess energy from power plants. This will become more competitive in the future, so dams, geothermal energy and investment into other renewable energy sources will have to be considered by miners.
Many publications merely report the growing energy use but do not break down the source of the energy, this is very disingenuous.
The infrastructure needed to power the banking sector, the Wall Streets, the Canary Wharfs, and other financial centers along with all of their regional operations far exceeds Bitcoin. But Bitcoin power use can grow if nation states get involved. Let’s revisit this narrative next year!
Trading, Derivatives, Risk Management
We talked about exchanges, but this section is more about the products available. Being interested and exposed to bitcoin means a binary and linear financial bet and that sucks because you are either long or short bitcoin. It is an unnecessary subscription to a totally zero-sum game. The spot market sucks and the synthetic spot market sucks.
Trading bitcoin spot (meaning bitcoin itself that you can withdraw to a private wallet) has those bucket shop exchanges. Trading synthetic spot means even worse exchanges or the dumbest ETFs (exchange-traded funds) I have ever seen in my life, besides $TVIX 📉.
For synthetic spot, we have non-US regulated “perpetual swaps” and futures. The contract standardization is an oxymoron, the leverage is applied in mysterious ways, the margin categorization itself is unknown and basically fictional, there is no way to do this without trusting the exchange, and the fees to maintain a position are exorbitant. Bitmex is the largest of these, and it is MEME CENTRAL. Arthur Hayes is Chairman at the Central Bank of Memes. So you have linear bets, and leverage linear bets, and thats it. Proper derivatives allow for risk management like insurance: a small cost for a huge payoff in adverse market conditions. Options contracts do that best, more on that later.
For US-regulated synthetic spot, we have Barry Silbert’s $GBTC concoction, trading on the OTCBB which allows stock investors to gain exposure. GBTC fulfills a need, it sucks because of its 30–120% premium. It sucks because an ETF on the stock market is constrained to stock market hours and that the bulletin boards have mostly non-existent pre-market and aftermarket trading hours. It sucks because OTCBB doesn’t have options contracts, and even if GBTC wasn’t on OTCBB but on proper NASDAQ it probably still wouldn’t be optionable.
We also have US-regulated Bitcoin futures, and they’re pretty liquid in 2019. They trade 24 hours a day, 5.5 days a week. CME Group runs these and people with futures brokerage accounts get access to these. Why do they suck? Well, the margin requirements are quite high compared to other futures contracts. And they are cash-settled, meaning no actual bitcoin is involved 😩 This makes these products as much of a video slot casino as Bitmex, for entirely different reasons. Weak.
Development in this space is that the startup Bakkt Inc, a new subsidiary of CME competitor NYSE/ICE, is aiming to launch bitcoin settled futures contracts. But they were supposed to do that “in two weeks™” six months ago, still waiting. Let’s revisit this next year!
In the other corner of the derivates space features options contracts, things are heating up but on the lowest setting of an inductive stove. Bitcoin options contracts will be the biggest wealth transfer in human history if several structural things get sorted out. By my metric, bitcoin options contracts basically don’t exist.
In the non-US regulated space, Deribit nominally operating out of Singapore has offered them since 2016 or so. They’re decent, although lack any recognizable contract standardization and the spreads are too wide for use, and oddly have bid and asks priced in bitcoin instead of dollars. I did like the strike placements. Every glimpse I take at this site doesn’t seem to show improvements in this arena.
In the US regulated space, LedgerX has offered them, as long as you have $10,000,000, to begin with. Wtf? There is a consolation prize of requiring only $1,000,000 if you unilaterally decide you are hedging. So thats what one of my companies did, “self-certified” that we are “hedging”, and amongst other trades we also hedged our crypto exposure during 2018 with bitcoin put options and what I can tell you is that the spreads are ridiculously horrible, the strikes are spaced way too far apart, and you have to negotiate prices with members in their chat room in order to get a fill at all. Doing this with any real size or volume is a non-starter.
New developments in this space in mid-2019 are that the regulator, the CFTC (Commodities Futures Trading Commission), has recently approved LedgerX to offer bitcoin options to retail. No net worth requirements necessary! Yay! LedgerX market hours let you trade bitcoin options 23.5 hours per day, 7 days per week.
But right now, nobody can trade these in their existing brokerage account. I can’t go on Interactive Brokers or TD Ameritrade and trade Bitcoin options. Nowhere under the commodity-futures market regulatory system, not under the indices, not under an ETF in the stock market. Totally lame, weak, no clear predictable regulatory structure or trading experience. No real way to manage risk. Maybe LedgerX gets bought out of TD or Goldman Sachs so they offer these products without having to build anything new🤞🏽
So 2019 sucks for managing risk and it is more likely that most of the remaining upside will be gone by the time it is less risky. Easy enough bet, long bitcoin. Let's check back next year!
The whole world is waiting for the United States to figure out how to regulate bitcoin.
By 2019 it has at least been established what kind of asset Bitcoin is, and that is a digital commodity. We can operate under the assumption that Bitcoin spot exists under the commodity framework, which means nominal oversight of but a total absence of further regulation from the CFTC, and only regulation of the bitcoin futures market.
This removes a regulatory cloud, but potentially introduces CFTC licensing requirements for custodians trading on behalf of other people.
The CFTC is the one holding up the existence of physically settled Bitcoin futures, Bitcoin futures options, Bitcoin spot options, Bitcoin index options. But again, they just approved a few entities including LedgerX to offer bitcoin spot options to everyone. The CFTC is the most flexible of the financial regulatory agencies, they like Bitcoin but still have their hands tied in a way they believe is responsible for the markets. The CFTC will greenlight anything, and US Congress will outright ban a contract before the CFTC says no.
The SEC (Securities Exchange Commission) is a lot more conservative than the CFTC and is holding up a proper bitcoin ETF and exposure to trillions of dollars already sitting in stock brokerage accounts. Specifically, an ETF that could be optionable. The SEC’s fictional higher standards of review on this matter have pushed the entire bitcoin and crypto industry forward much faster 👍 even though it is frustrating that they are also holding back innovation. The largest exchanges have done lots of things to add confidence to the markets, to avoid getting hacked, and help with price discovery and avoid fraud. The SEC wants these things even though it is not tasked in regulating spot markets, they are in the place to gatekeep a bitcoin ETF for now. Also, the employees of the SEC don’t want such a thing to exist, as they have been captured by the incumbent financial system which hates bitcoin. Too bad, since the SEC commissioner vacancies were part of a coup to benefit the crypto space. I would say that has failed at being the accelerant it could have been. So far only 1 commissioner appointee has flipped pro-crypto ETF, her name is Hester Pierce. The SEC also has a proposal to stop gatekeeping ETF approvals entirely, which would greenlight Bitcoin ETF approvals too. They all come with prospectus’ already, let the market decide if they are useful, just like with every IPO. The SEC isn’t tasked with reviewing the merit of investments, but ETFs happen to be passive funds with managers that are also publicly traded, so there are a variety of acts that have resulted in the SEC effectively judging the merit of investments. Let's check back in 2020!
The SEC and FINRA’s rules on digital asset custody have helped move things forward a bit. Bitcoin asset classification clarity from the CFTC and the SEC/FINRA movements are pushing things forward!
I wanted standardized exchange-traded Bitcoin options way back in 2014 though, so I am disappointed.
My 2014 stablecoin patent on spot digital asset hedging using distributed ledgers technology will benefit from all of this. Especially as these companies independently realize they want to lock down all the IP, or independently come to the same conclusions that this patent describes and try to offer the products described in it. 🤑🤑🤑 Assuming financial institutions like monopolies through 2036.
Onchain bitcoin derivatives circumvent all of these regulatory approvals. You should be able to trade bitcoin futures, swaps, and options straight from your private personal wallet, instead of having to deposit funds with LedgerX or any of these exchanges. Some people have created these already. Let's check back next year!
FinCEN and the US Treasury updated their guidance on digital assets, including bitcoin. Most of it only applies to more functional blockchains that are lightyears ahead of bitcoin.
The IRS is still operating on their 2014 guidance calling bitcoin “property”, which fits with the commodities spot tax treatment well. So the CFTC, SEC and IRS aren’t conflicting with each other anymore, but now there are outstanding questions.
Do Bitcoin options contracts now count as Section 1256 contracts subject to the favorable 60/40 rule tax treatment where every single trade gets 60% long term capital gains treatment? 🤑🤑🤑 I met with LedgerX at our office last year, and they said their conversations with the IRS on tax treatment weren’t going well in that regard, but I don’t get the impression that the IRS has any say in this matter with Bitcoin being considered a commodity by a totally different federal agency. When Bitcoin options really come out, I’ll report my options trades under the Section 1256 regime and let you know how it works out!
Its 2019 and only bitcoin is being considered by all these agencies. Want Ethereum futures or options? Tough. Ripple XRP risk management? Get out of here you madman!
The bitcoin community is better than ever!
During the dark years, there were one or two forums to talk about bitcoin. And in the darker years, it turned out all of those forums were owned by the same guy, so software upgrades and ideas that lacked consensus were unable to gain consensus because that guy would ban dissent. This contributed to segwit and Lightning Network taking 15 months longer to happen than necessary. As in the code was already there, it just needed such a high percent of consensus — more than a constitutional amendment — and people wanted to be informed to discuss possibilities. Fortunately, this charade Theymos conducted pushed many productive members of the bitcoin economy away to build their own communication channels. I had several Reddit accounts banned from several bitcoin channels for “promoting hostile technology” throughout 2015–2016. Anyway now Facebook groups are huge and numerous, Youtube communities on live streams are vibrant, Telegram groups are ridiculous, Wechat, Line, Kakao, you name it. I’ve been invited to several Whatsapp groups full of professionals in the last two months, which I respectfully declined because of sim swappers.
Bitcoin communities are more mature than ever. People from all walks of life, with influence in all sorts of places, are part of them. The speculation drives the innovation, they wouldn’t be here if the ways to make money and apply themselves weren’t so numerous. This is the same for the regulators and governments. Politicians ARE bagholders from the 2017 bubble and realize that they are in the place to make bitcoin more widely held and useful to more people. To some thats an indictment of the concept, to others the blockchain is acting the way it was built to act. It propagates by co-opting human desire.
The marginalized anarchists are gone and the “bitcoin maximalists” who believe there can only be one digital asset have basically been drowned out. Bitcoin is much more accessible than it was, even though this whole essay is about how much it sucks.
When President Donald Trump tweeted some run of the mill copy-pasta 🍝negative towards Bitcoin, all of the crypto twitter responded so fast that even the Russian bot farms were so confused they just decided to sit that one out.
The education is pretty bad. Academic, citable books have only existed for a few years now. Globally, the terms are not standardized and very misunderstood. There are a lot of grifters who have no idea what they are talking about and make it hard to work with. I once heard a partner in Europe think Bitcoin Cash was more like a fiat cash version of Bitcoin, made to help with person to person “OTC” trades. I once had a disagreement on Hackernews when I mentioned many people quote digital asset prices in Satoshis or “sats”, and the people there at the time had never heard that and wanted academic citable sources proving something not worth proving, so they didn’t believe it. (A satoshi is the smallest denomination of a bitcoin, currently, 8 decimal places in, within the bitcoin economy many goods and services are priced in bitcoin, so instead of something costing “.00000823 BTC”, people may say “823 sats” instead. Now many people use this for things priced in other assets, but with adjectives like “Eth Sats” for a fractional amount of Ether.) All it comes down to is that I can communicate with traders in the parallel bitcoin economy, while many bitcoin enthusiasts have never traded in the bitcoin economy and are maybe trying to trade their bitcoin for more dollars than they bought it with. There isn’t a benefit in proving that people say satoshis in the middle of a casual conversation, trades work better when someone is ignorant 🤷🏽♂️
Politicians conflate all of the concepts and are being lapped by technology in general. They are an extension of the people they represent when it comes to bitcoin and the whole space, but for the most part, the US government has taken a balanced and measured approach so far. Self-appointed bitcoin delegates to Congress and legislatures worldwide have been a mess of misunderstandings and talking past each other, but the outcomes for new laws being passed have been mostly good so far, and are getting pretty mature. The laws have primarily been about the crypto space as a whole, and not really anything helping or hurting bitcoin.
David Marcus is going to do the Libra dance in front of US Congress on behalf of Facebook, yikes, but “ex-payments” people do have a lot of influence and network to get where they are. One recruiter for Facebook tried to see if I was a fit for the Ca/Libra project, but without my “ex-payments” experience — which means “not ex-PayPal” which means “David Marcus hasn’t heard of me” — we’ll just have to revisit this next year! The main thing I would offer them is layer 2 architecture similar to Lightning/Raiden or sharding to help with throughput. The Delegated Proof of Stake style node system they are doing might suffice, but really not everything needs to be on-chain.
Justin Sun of Tron is going to bring several crypto OG’s like Charlie Lee to sit down with Warren Buffett, I expect that to be an amateur hour when the key is to talk about how Buffett’s value investing principles have been applied to the crypto space and amplified by bitcoin. A year from now, it will be interesting to see if the people influenced by Warren Buffett’s conservative investment guru brand will be speculating in the bitcoin space. I personally like Warren Buffett’s leveraged investment days from the 1960s and 1970s that got him where he is, that Warren Buffett in his 30s and 40s would enjoy the overleveraged Bitmex memes.
Personal finance communities are still hostile to the word bitcoin. Thats a contrived meme upon itself, at one point they bolstered their position based on regulatory uncertainty but that has evaporated. Trading and holding bitcoin is often not suitable for people that need basic financial education and help, but recognizing that your new LLC doesn’t need a bank account to transact globally in 2019 is not controversial. The consensus in those communities it is a bit better than it has been though, but now they are hostile to space because they’ll otherwise get brigaded by people advertising other unsuitable digital assets.
So, a long way to go! The great thing about permissionless technology is that you don’t need permission to contribute either! I identify these problems and help move things forward where they are broken, both personally and through my companies Blockology (Blockchain Development Company d/b/a Blockology) where we build and advise companies in the distributed ledger and blockchain space, Pareto Network where we trade information using blockchain technology, and others I advise. You can too! Addressing these problems makes all of my companies more viable and useful to a broader community! Reach out if you need guidance navigating the crypto space!
The private industry spends an inordinate amount of resources looking for specialists and marginalizing people with deep capabilities across a wide spectrum, but Bitcoin, Blockchain and Crypto space rewards generalists as far as they can apply themselves. This parallel economy is the true land of opportunity, and I hope it is clear where you can push it forward.
That’s a wrap everyone! In future series, I plan to highlight the state of the crypto space as a whole and other crypto networks like Ethereum. We have to revisit this once per year to see if anything has improved!
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