Who controls Bitcoin? ????

Woah, two Bitcoin pieces in two weeks? You’re slipping, Matt. But I have reason to go back to BTC this week, I promise.?

That's because last week I wrote about how Bitcoin’s price crashed because one seller decided they’d had enough. This week meanwhile, and you can find a bit more about it below, there are alarm bells over Bitcoin’s liquidity.?

The amount of traders and trading is declining, meaning there are fewer people buying and selling. When that happens in a marketplace, prices move up and down more aggressively because what trades and traders are left, start to have a disproportionate impact on the price.

Which got me thinking: if anyone with a GCSE in Business & Economics (yours truly) knows this happens to a marketplace, people with big brains and big wallets know this too. And they have the means to start to move the markets in their favour.?

So this week I’m going to be looking at how Bitcoin’s price might be in the hands of a few powerful whales, and what that means for very average people like myself. Ready? Mush!?

Whale Watching???

First it’s worth spelling out just how shallow the Bitcoin market really is. This is typically measured by how much Bitcoin is in circulation, versus how much is locked in cold storage - wallets that aren’t connected to the internet, and, it’s assumed, not being used actively in the market.?

Last year, millions of Bitcoin were taken out of exchanges and into cold storage. Estimates suggest that just 12% of total supply is currently in a position to be traded in hot exchange wallets.?

While most Bitcoin has typically been locked away for a rainy day, the issue has accelerated this year, and it’s now starting to creep into markets.?

When liquidity is low, investors have to pay a larger amount for something called slippage. This is the difference in the price a trader buys or sells at and the price they ultimately pay.?

In the Bitcoin markets, slippage has been creeping up in 2023. The below chart shows the difference in price spread across major exchanges in 2022, compared to 2023.?

This now makes anyone with a lot of Bitcoin more powerful than they were. They have deep enough pockets to create liquidity, but also take it away. They also have the power to hold the price in place, or send it up and down, as we’ll look at now.?

Market Movers ??

There’s been a lot of debate as to why Bitcoin’s price has surged while the industry around it has burst into flames. Since the FTX collapse, a host of other companies have been pulled down with it, regulators are tightening the noose on exchanges, off-ramps have collapsed and a sizable chunk of money from other parts of finance have left the industry in favour of AI. So why is Bitcoin’s price seemingly on an upward trend??

Some argue that Bitcoin’s enduring quality as a store of value is what’s causing more people to buy. But as I’ve already argued, less money is sat on exchanges, and price slippage is going up, showing the market is getting smaller. A significant amount of trading volume is also now believed to be fake. So what gives??

Two finance professors looked at this issue in 2017 to understand what caused Bitcoin’s price to miraculously climb to its previous highs of $20,000.?

John Griffin and Amin Shams – instructors at University of Texas and the Ohio State University, respectively – analyzed over 200 gigabytes of data for the transaction history between bitcoin and tether. The conclusion??

A single whale used Bitfinex, the sister company of Tether to create artificial price floors - basically prices an asset never seems to go below - in Bitcoin’s price that created an illusion of safety that pulled in investors to push the price up.?

Effectively, an actor or actors created the conditions to make Bitcoin seem like it was doing well, giving positive signals to other investors to join in. The same thing, say the authors, is happening again in 2023.?

Despite the crypto crash and myriad other negative forces, every time Bitcoin briefly breached the $16,000 floor, it bounced above that level and kept stubbornly trading between $16,000 and $17,000. Which is weird, because Bitcoin’s price is prickly. Here’s a chart of Bitcoin volatility since inception.?

And here’s a chart from the last six months.?

From November 5, the day before the FTX reports started spreading, to November 9, Bitcoin dropped from $21,300 to $15,900, its lowest reading since late 2020, for a fall of 25%. But then the price suddenly went flat.

In the 62 days between November 10 and January 11, it traded between $16-$17,000 for all but one day. Surely that is just market forces believing Bitcoin is worth that much? Sure, it might be.

But don’t you find it odd that arguably the most sizeable collapse in the last year would do more to Bitcoin’s price? At the peak of the FTX fallout Bitcoin showed its smallest price swings across 60 days than it had over the last six years???

Almost unbelievably, as the crypto market has continued to unravel into 2023, Bitcoin has gone in the opposite direction, hitting $30,000, driven seemingly by a confidence no one seems to accurately know why. Sure, broader economic forces have improved slightly, but asset markets have not shown the same optimism Bitcoin has. Time to look a bit further.??

The Tether Connection???

Tether, the world’s largest stablecoin is the single largest trading coin with Bitcoin. It’s also the largest trading coin with Ethereum, too. Essentially more money switches between Tether and Bitcoin than it does anywhere else. Here’s a snapshot from yesterday.?

Critics have long argued that Tether prints money and that money is almost always used to buy Bitcoin. Those critics argue that this is a form of manipulation, because Tether issuance typically leads to a Bitcoin price surge.?Whoever has their finger on the Tether printing button, has the ability to alter Bitcoin's price.

Tether has said repeatedly that it is being discredited by malicious actors, what people in crypto would call spreading FUD, or what Changpeng Zhao calls “4”.? There are also academics that agree that Tether isn’t used to inflate Bitcoin’s price.

HOWEVER. In 2023, the correlation between Tether printing and Bitcoin price has come alive again. On March 16, Tether minted a billion new Tethers, which was right at the time Bitcoin’s price began its march north.

You might argue that’s completely normal, more people want Tether to buy Bitcoin. Indeed, last week, they minted another billion Tether and the price of Bitcoin didn’t respond accordingly. But it gives rise to another question: who is asking for more Tether??

Last year, it emerged Alameda Research was Tether’s biggest customer, and had pumped $36 billion into the stablecoin. Surely the collapse of its biggest customer would cause issues to Tether??

Indeed, there is a fun game among financial journalists and other interested observers who try to find out where all the money Tether has sits, and who is trading with it. The game is hard! As far as I know, no one has ever won it, or even scored a point; I have never seen anyone publicly identify a security that Tether holds or a counterparty that has traded commercial paper with it.

So what does this all mean??????

Woah, I’ve written way too much already. To some of you this might sound like I’ve completely lost it. I’ve given up on society, and am now a desktop justice warrior, spreading FUD. I mean I am wearing shorts when it’s pissing with rain outside, and my hair looks like it and I have been dragged through a thousand hedges.

But to others, prodding and questioning the health of the world’s biggest cryptocurrency is necessary because a lot of people have put an awful lot of their money into something that might be controlled by people who care little for your hopes and dreams.?

The choice, as always, is up to you.

What people are shouting about this week

• Coinbase is fighting US regulators - The American exchange has come out fighting. After the SEC rugged it for breaking securities laws, Coinbase has filed legal action against them. In its first salvo, it asked a judge to compel the SEC to clarify its crypto regulations. Next up, it threw shade over the issuance of a Wells notice, saying the SEC risks damaging its reputation if it continues its legal challenge. While it’s unlikely to change the SEC’s mind, Coinbase has been picking up licenses offshore to run its business away from US lawmakers. The plot thickens.????
• Crypto companies are buying treasury bonds to boost yields - Yep. DeFi projects, the futuristic face of finance to come, have been quietly buying US treasury bonds and offering them to customers. Aave and Maple Finance have both offered these products to non US crypto investors who want yields, but don’t have the appetite for wading through crypto’s increasingly murky waters.?
• NFT sales continue to decline - It’s not looking good for anyone looking to liquidate their NFT hoard at the moment. NFTGo, an analytics platform, found there were just 7,907 buyers compared to the 8,641 sellers on April 26. Previously, the market fell to its second lowest point in the last 12 months on April 19 with just 5,893 buyers. For comparison, the number used to be around 20-60,000 daily trades.?
• A mysterious bitcoiner discovered 1,000 wallets operated by Russian spy agencies - An unknown bitcoiner has been doing some sleuthing. He, she or they found 986 wallets that used the Bitcoin network were owned by Russia’s Foreign Military Intelligence Agency (GRU), Foreign Intelligence Service (SVR), and Federal Security Service (FSB). No one knows who the leaker is, but the findings were published in Russian, and shared with security firm Chainalysis.?
• Crypto turns to AI to help get it through crypto winter - Crypto companies are having a tough time at the moment. Users are falling, prices are stagnant and regulators are gleefully kicking the crap out of them - in America at least. But this week, a number of crypto projects have embraced AI as a way of riding out the bad times. Solana is integrating ChatGPT to make it easier to interact with the blockchain, as has Binance. Near has invested heavily in an AI shopping project, and even Visa is looking for crypto engineers with AI chops.?

The at first glance incredibly boring, but in reality, incredibly insightful and interesting thing you should read this week ??

The Vatican has gotten into the blockchain business. Wait! This is interesting I promise. The Vatican Library, home to 1.6 million books, 80,000 handwritten pieces, 300,000 coins and 150,000 prints and drawings is digitising its entire collection and making it available to the public. Working with NTT DATA an archiving company, its combining blockchain’s ability to preserve metadata alongside 3D scanning and digital restoration, rather than just blockchain on its own. Why is this interesting??

Because it points to a future where blockchain’s database preserving qualities are bundled into a broader package of tech solutions, rather than as an end in itself. See, told you it was interesting.?

Chart of the week ??

Bitcoin trading volume is in freefall. As investors have fled the market amidst wider uncertainty, liquidity is drying up. Which is leading to a lot more price volatility, as you’ve probably noticed this week.

Strange but true ??

• A french movie star was found guilty of luring investors into a scam - Kev Adams, a well known face in French circles has, it’s been reported, been caught with his hands in the crypto scam jar. It is alleged he managed to pull in 770 investors to fund an animated feature film called Plush. He was so good at it, he managed to extract 1.5 million Euros from the poor souls. What happened to the film? Apparently they spent all the money on “American influencers”. Typical.?
• A North Korean banker has been helping spies earn money working for US IT companies - Sim Hyon Sop has been charged by the Department of Justice for money laundering using crypto for the Korean regime. Sim, an employee of the North Korean Foreign Trade Bank had been using his skills to help funnel ill-gotten gains from crypto hacks back home to Pyongyang. But there’s more, he was also a conduit for IT workers, who, working under forged papers, had gained employment at US IT companies and were sending the money home.?
• A pencil manufacturer has joined the metaverse - Thank god! Yes, Faber-Castelle, a very old Swiss pencil maker has made the somewhat bizarre decision to create its own metaverse. If you choose to join this place that promises to be “more than just a story or a community” - I didn’t know anyone was asking for those two things to be combined - something magical will happen. Presumably.?
• Sam Bankman Fried’s favourite video game is shutting down, because of SBF - Yup, Sam Bankman Fried loved Storybook Brawl so much, he bought it in March last year. But, like everything Sam has touched recently, it has turned to shit. The company has run out of money and is shutting down its servers on May 1 as their investment never materalised.??
• A Bitcoin thief who posed in a bathtub full of money sentenced to 4 years in jail - Gary Harmon was on cloud nine. He had successfully stolen 718 Bitcoin from a wallet in police custody belonging to his brother, and so of course, he decided to pose in a bath full of money to celebrate. But those days are long gone, Gary. This week he was sentenced to four years in jail after admitting using his brother’s credentials to recreate eight Bitcoin wallets stored on a device in an Internal Revenue Service evidence locker in April 2020.?

AANNDDDDD that's your lot. This was a long one wasn't it? If you made it this far, ask yourself this: would you like this in audio form? i.e. should I just read this out loud in my nicest, most Britishest voice so you can tune in while doing the dishes? Lemme know!

I love you all. ????