Welcome to the 62nd edition of ‘The Digital Asset Digest’. Today, we discuss what the drop in mining difficulty means for Bitcoin, and take a closer look at CBDCs.
“CryptoQuant Quicktake is a platform on which verified analysts share their take on crucial Bitcoin (BTC) metrics and their possible effects on Bitcoin (BTC) price dynamics.”
“In what seems like another blow for the Indian crypto community, one of the biggest financial services, ICICI Bank, has warned users not to use their remittance services for transferring any form of crypto or digital currency.”
“The world’s largest digital asset manager, Grayscale Investments, has partnered with America’s oldest bank BNY Mellon. As a result, the banking giant will provide the Grayscale Bitcoin Trust with fund accounting and administration starting later this year.
“Applications running on Polygon, Binance Smart Chain, and Arbitrum can now use Gnosis Safe to enhance their smart contract security.“
“$250 million worth of cryptocurrency has been confiscated by UK police in the biggest such move of its kind, the London Metropolitan Police announced early on Tuesday. It broke last month’s $180 million seizure record set by local authorities.”
INDUSTRY WIDE SNAPSHOT
The Impact of Bitcoin Mining’s Difficulty Plunge
Mining Bitcoin became significantly easier in recent months. Mining difficulty is measured as the amount of computational power required to mint each new unit of BTC. This month, the difficulty level dropped significantly, which has wider implications for the entire digital assets sector.
Here’s a closer look at why this difficulty is dropping and what lies ahead for Bitcoin.
China’s Bitcoin clampdown
In May, Chinese regulators turned their attention to the local Bitcoin mining industry. Sweeping new rules effectively banned the practice in several Chinese provinces. Experts believe this is an attempt to curb the industry’s environmental impact but also a way to clear the path for China’s upcoming digital yuan.
The clampdown is significant because China accounted for roughly 70% of the Bitcoin network’s mining capacity earlier this year. At the time of writing, 54% of bitcoin’s hashrate, which is the collective computing power of miners worldwide, has gone offline. Now, investors, developers, and miners are bracing for the impact of this shift.
The Bitcoin community sees China’s dominance in the mining sector shrinking rapidly this year. That means the network’s future has been permanently altered.
For one, mining is easier, and thus more profitable, for miners who remain online. Mining difficulty has dropped 28% from its peak in May. Bitcoin’s price, meanwhile, has been relatively steady over that period. That means a miner in Iceland or Canada now has wider margins on their operations.
However, this boost to profitability is expected to be temporary. Chinese miners are already shipping equipment and hiring people in other parts of the world. This migration seems to be focused on destinations with better crypto regulations and cleaner sources of fuel.
Canada, for instance, has become a prime destination for Bitcoin miners. 67% of Canada’s electricity is derived from renewable sources – predominantly hydro. Similarly, miners are also heading for parts of the United States where energy is cheaper and greener than average. Texas is quickly becoming a Bitcoin mining hub, as the exodus continues.
By the end of the transition, the majority of Bitcoin’s hashrate could have moved to regions with cleaner sources of fuel. That should mitigate one of the most common criticisms of the digital asset – that its use is harmful for the planet.
China’s sudden clampdown on Bitcoin mining has been immensely disruptive for businesses in the region. Years of investment have been effectively destroyed because of this. However, the move has made Bitcoin mining temporarily more profitable and less competitive for miners who remain online in other parts of the world.
The clampdown and migration could also make the industry a lot more sustainable. In most cases, Bitcoin miners are seeking to move their operations to destinations with the best laws, the cheapest electricity, and the greenest fuel. That puts Canada, Europe, and parts of the U.S. on the top of their list. Bitcoin’s future could be greener and more lucrative than ever before.
EXPLORING NEW IDEAS
A Closer Look At CBDCs
“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust,” said Satoshi Nakamoto in a message that introduced Bitcoin to the world for the first time. It was clear that this peer-to-peer digital currency was a reaction to government control of the currency system.
Now, more than a decade later, central banks and governments seem to have embraced Nakamoto’s technology to further entrench their fiat currencies. Several countries are actively experimenting with blockchain-based digital currencies. Here’s a closer look at this new crop of so-called “central bank digital currencies” or CBDCs.
What is a CBDC?
The key differentiator between cryptocurrencies like Bitcoin and a CBDC is permission. The Bitcoin network doesn’t need permission to operate or control supply. Instead, supply is limited by the network, and operations are handled by a distributed network of nodes and miners. This system is completely decentralized.
CBDCs, as the name suggests, are centralized. The central bank or government of a nation seeks to deploy a CBDC. Effectively, this central entity also controls the supply and validators on the network. Besides that, the underlying distributed ledger technology is similar to Bitcoin and other digital assets. While several countries are actively experimenting with digital currencies, China seems to be at the forefront. Earlier this week, the Chinese central bank distributed $40 million in red envelopes with digital yuan to a limited group of early testers. Roughly 10 million citizens have been whitelisted to participate in the program. If successful, China could become the first nation to roll out a CBDC nationwide.
Rumored features of the digital yuan could indicate the benefits of this transition for central banks. A digital currency could be easier to track, cheaper to use, and much more programmable than traditional currencies. For instance, some reports suggest the Chinese government could designate what purposes certain e-CNY tokens can be used for (food, ridesharing, etc.). The tokens could also be locked or confiscated easily if the user runs afoul of local laws.
In short, a CBDC offers governments greater control of the economy with less friction.
What impact does this have on Bitcoin?
Bitcoin’s appeal as a decentralized currency that is beyond the control of central banks and governments is, perhaps, enhanced by these CBDCs. However, if these CBDC experiments are successful, it could alter the regulatory treatment of Bitcoin.
Chinese authorities, for instance, have banned Bitcoin mining and blocked crypto transactions from traditional banks as their CBDC experiments ramp up. If the digital yuan is a success, this regulatory clampdown on BTC could expand. Whether the introduction of CBDCs in other nations will have a similar impact remains to be seen.
Bitcoin was created as an alternative to sovereign fiat currencies. However, its underlying technology is now being used by some nations to introduce their own CBDCs. These centralized digital currencies further entrench government surveillance and economic powers. Whether they’ll be successful and mainstream remains to be seen.
TOKEN OF THE WEEK
Tether is, perhaps, one of the most controversial projects in the digital assets space. Millions of users seem to rely on this asset to trade frequently and safeguard cash during turmoil. However, critics have argued that Tether’s underlying financials and lack of transparency pose a substantial risk to the entire crypto ecosystem.
Here’s a closer look at this divisive instrument.
Launched as RealCoin in 2014 and eventually rebranded as Tether, USDT is one of the earliest stablecoins on the crypto market. Each token is pegged to the value of the U.S. dollar. In other words, each USDT should present $1, although it often trades at a slight premium or discount to that amount.
Tether was the first to solve a critical problem in the crypto assets industry – the disconnect between fiat currency systems and the emerging world of tradable digital assets. Traders faced immense volatility, high fees, and delays that could last days while trading with traditional bank accounts and U.S. dollars. Not to mention the tax and regulatory implications of frequently converting fiat to crypto and back again.
Tether solves this by offering a digital asset that represents U.S. dollars. Traders can use it as a safe haven when they want to cash out from their investments. They can also use the tokens to borrow or lend capital with stable and predictable value. Converting Bitcoin or any other digital asset into Tether’s USDT should be relatively cheaper and quicker because it’s a swap between two blockchain-based networks.
The underlying tokenomics of Tether have invited scrutiny in recent years. Tether Ltd., a company controlled by the owners of Hong Kong-based cryptocurrency exchange Bitfinex, claims to maintain U.S. dollar reserves to back each USDT token with a dollar. However, the company has recently settled a case with the New York Attorney General’s office, which compelled it to pay an $18.5 million fine and provide a breakdown of its reserves for the first time.
The breakdown revealed that only 2.9% of its reserves were held in actual cash. The rest was based on a combination of “cash equivalents” such as commercial paper, fiduciary deposits, reverse repo notes, and treasury bills. In fact, cash and cash equivalents only contributed 75.85% of Tether’s total reserves. The rest was based on secured loans, corporate bonds, precious metals, and other digital assets.
Despite its lack of transparency and complex reserve management, Tether is one of the most popular stablecoins on the market. In fact, USDT accounted for 57% of all Bitcoin trading as of February 2021, according to CryptoCompare.
The fact that the majority of Bitcoin trading is conducted with an asset with such complicated underlying reserves puts the industry at risk. Eric Rosengren, president of the Federal Reserve Bank of Boston, recently claimed that Tether’s impact on financial stability was being monitored. While a report published by JP Morgan claims that if traders lost faith in USDT, it could “be a severe liquidity shock to the broader cryptocurrency market.”
A snapshot of Bitcoin’s spot price as of this writing is $32,540.65 representing a 6.49% decrease in trading volume since July 12th at 9:15 AM. The 30-day volatility of BTC is 68.73%. Bitcoin remains the top cryptocurrency trading with support at $27,000 and resistance at $36,000.
ETH is trading at $1,981.79 as of this writing, representing a 24-hour increase of 0.31%, and 30-day volatility of 84.04%. Over the last 24 Hours, the trading volume increased by 15.59%. As of today, ETH holds 17.26% of the cryptocurrency market, making it the second-largest coin traded. It has a circulating supply of 116,675,503 coins, an increase of 53,391 over the weekend.
THIS WEEK’S DEEP READ
“Net Unrealized Profit/Loss (NUPL) will be analyzed and compared to the previous bullish cycles, in order to determine if the long-term trend is still bullish.”
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