The Wolf Den #679 - Decentralization Nation
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In This Issue:
Decentralization Nation
Bitcoin Thoughts And Analysis
Altcoin Charts
Legacy Markets
China Does A 180°
Mt. Gox Creditors Help Ease The Pain
Don’t Be This Guy
SEC Sues Do Kwon
Decentralization Nation
Have you ever noticed how the words "cryptocurrency" and "decentralization" are often used interchangeably, yet there seems to be no consensus on what decentralization truly means? While there is a clear definition for what constitutes a cryptocurrency, the same cannot be said for decentralization.
In my opinion, both Bitcoin and Ethereum are decentralized enough, despite differing opinions from maximalists, self-proclaimed experts, and even cab drivers. When it comes to measuring decentralization at a technical level, there are certain aspects that can be agreed upon. However, attempting to quantify or measure decentralization in a broad sense of fundamental analysis is incredibly challenging.
In the case of both Bitcoin and Ethereum, there are different ways to measure decentralization. For example, for Bitcoin, one could look at the ease of hardforks, the distribution of wealth, or the number of exchange pairs. Alternatively, one could examine mining pools, the distribution of hash power, or hardware manufacturer market share. Similarly, for Ethereum, decentralization could be measured by counting and analyzing the number and types of staking pools, the percentage of the supply staked, or the role of the Ethereum foundation.
The point I am trying to make is that decentralization means something different to every protocol and investor. As rational thinkers, we must be open to the idea that it is not an exact science. For those who prefer equations, the Nakamoto coefficient is a popular but complicated method that can be used to measure the decentralization of any blockchain. It takes into account various factors, such as mining, clients, developers, exchanges, nodes, and owners.
Here’s a quick excerpt I found on the Nakamoto coefficient:
“The Nakamoto coefficient measures decentralization and represents the minimum number of nodes required to disrupt the blockchain's network. A high Nakamoto coefficient means that a blockchain is more decentralized.”
“The Nakamoto coefficient was first formally described in 2017 by former Coinbase CTO Balaji Srinivasan. This measurement is named after Satoshi Nakamoto, the presumed founder of Bitcoin. However, the Nakamoto coefficient isn’t a Bitcoin-only measurement. Instead, a Nakamoto coefficient can be used for analyzing a variety of blockchains.”
As you can probably guess, Bitcoin ranks #1 for this method. Ethereum cannot be measured, which is convenient. Now that we know obtaining a complete picture is really difficult, I want to highlight a few of my favorite (simple) methods to compare the decentralization of Bitcoin and Ethereum. Often, simplicity is better.
The distribution of Bitcoin’s hash rate by country
United States: 35.4%
Kazakhstan: 18.1%
Russia: 11.23%
Canada: 9.55%
Ireland: 4.68%
Malaysia: 4.58%
Germany: 4.48%
Iran: 3.1%
Bitcoin Pool Distribution
The Bitcoin Rich List
I won't go in-depth on each of these methods because I might lose my audience, but I suggest taking some time to explore each of them if you're interested. Links are provided for each of the pictures. Now, let's take a closer look at Ethereum.
Ethereum Clients
Validator Distribution By Staking Pools
Supply Distribution
If you've made it this far, I applaud you. I believe that these images are a solid starting point for diving into the never-ending decentralization rabbit hole. What you'll quickly learn, if you do dive in, is that this data barely scratches the surface of these two coins and doesn't even take into account the differences in protocol governance. Just because something is a cryptocurrency doesn't necessarily mean it is sufficiently decentralized, which is why, beyond Bitcoin and Ethereum, doing your own research is a must. I hope you have a great weekend, and as always, thanks for stopping by.
“The only way to control chaos and complexity is to give up some of that control.”- Gyan Nagpal
Bitcoin Thoughts And Analysis
$25,212. I've been screaming about this number for weeks. A break above (ideally close) makes a higher high for the first time since $69,000. That breaks the bear trend. Price just broke slightly above it... and dropped in the short term. Time to pay attention!
Ugly daily candle, with a long wick up through resistance and a large blue body. This candle looks like a clear top, but that depends on today’s follow up. A bearish candle needs confirmation on the following candle.
Price wicked slightly through resistance, known as a “bearish SFP” or “swing failure pattern.” This indicates that there was a ton of liquidity above that line and that whales were looking to sell and fill shorts.
You can see that price bounced perfectly from support to resistance, so we have no clarity on what comes next.
There is significant bearish divergence again with RSI (red arrows, lower high on RSI, higher high on price) which indicates that the move may be exhausted.
The first attempt at $25,212 failed, which is no surprise. This should not be easy, considering a close above that line would signal the end of the bearish market structure.
I have been posting bullish and bearish divergences, especially on the 4-hour chart, for years. The accuracy of these as signals (not 100%, of course) was largely the reason that I gained popularity on twitter in the first place.
And here we have it. Oversold bullish divergence at the bottom before the move up and overbought bearish divergence before yesterday’s crash.
Add in macro support at the bottom and resistance at the top and you have a very reliable trade signal.
We should once again see RSI head to oversold at some point in the not-so-distant future.
Altcoin Charts
Legacy Markets
European and US futures stocks fell, and the dollar strengthened due to growing expectations of steeper rate hikes after hawkish comments from Federal Reserve and European Central Bank officials. Yields on two-year and 10-year US Treasuries are at their highest level for 2023, and data shows that US producer prices rebounded in January by the most since June.
European rates-sensitive technology stocks led the decline in Europe's Stoxx 600 index, and the Bloomberg dollar gauge rose, erasing its losses for the year. Interest rate expectations are rising in Europe and the US, with money markets bolstering ECB rate-hike bets after a warning from ECB Executive Board member Isabel Schnabel that markets risked underestimating inflation. On the other hand, Bitcoin retreated, and cryptocurrency-exposed stocks fell in New York premarket trading, with Coinbase Global Inc., Riot Platforms Inc., and Stronghold Digital Mining Inc. among those in decline.
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 fell 0.7% as of 10:24 a.m. London time
S&P 500 futures fell 0.7%
Nasdaq 100 futures fell 0.9%
Futures on the Dow Jones Industrial Average fell 0.5%
The MSCI Asia Pacific Index fell 1.3%
The MSCI Emerging Markets Index fell 1.1%
Currencies
The Bloomberg Dollar Spot Index rose 0.5%
The euro fell 0.3% to $1.0638
The Japanese yen fell 0.7% to 134.91 per dollar
The offshore yuan fell 0.4% to 6.8939 per dollar
The British pound fell 0.5% to $1.1934
Cryptocurrencies
Bitcoin fell 3.2% to $23,738.81
Ether fell 1.1% to $1,665.05
Bonds
The yield on 10-year Treasuries advanced four basis points to 3.90%
Germany’s 10-year yield advanced five basis points to 2.53%
Britain’s 10-year yield advanced six basis points to 3.56%
Commodities
Brent crude fell 2.1% to $83.39 a barrel
Spot gold fell 0.7% to $1,823.62 an ounce
China Does A 180°
As the US continues to tighten its restrictions on crypto, China has decided to change its stance and welcome crypto back into the country. In May 2021, China strictly banned all mining in the country, and in September of the same year, it banned all crypto trading. However, miners have slowly resumed operations in China, and major crypto institutions such as Samsung, DBS, and IB are beginning to feel more comfortable. Hong Kong has set ambitious plans to become an Asian crypto hub.
Paul Chan, the Financial Secretary of Hong Kong, has stated that, as certain crypto exchanges collapsed, Hong Kong can become a quality standing point for digital asset corporates. Although China's current law only allows those with +$1m bankable assets to trade crypto, on June 1, 2023, the retail floodgates will open in Hong Kong and mainland China, allowing for buying, selling, and trading at will. This news has even encouraged multiple ETFs to apply for approval and companies to submit applications for digital asset licenses.
Perhaps this move by China will prompt the US to reconsider its strict position on crypto.
Mt. Gox Creditors Help Ease The Pain
It is remarkable that almost a decade later, Mt. Gox is still making headlines in the world of crypto. It makes one wonder what the future holds for FTX, Voyager, and Celsius, but that is a topic for another day. As previously mentioned, Mt. Gox's two largest creditors have elected to receive their bankruptcy recovery in Bitcoin. The concern was that if the creditors chose to receive a cash check, Mt. Gox's large sum of Bitcoin would flood the market and cause the price to plummet.
The process involves creditors waiting in line to receive their payout. They have the option of receiving an early payout at a reduced amount (around 90%) or waiting for the bankruptcy proceedings to conclude before receiving the maximum recoverable amount. Creditors who opt for an early payout at a reduced amount are expected to receive it by September 30, 2023. While it may seem that the finish line is near, sources familiar with the case predict that the full settlement could take another 5-9 years.
We have been hearing about Mt. Gox selling pressure destroying crypto for years… and it turns out to be yet another fairy tale that was entirely avoidable. Noise, not signal.
Don’t Be This Guy
I see this mistake happen all the time, and it can be costly. There is no such thing as "low enough" because when the market dips, there will be an even stronger narrative trying to convince you that prices will continue to drop. If you believe in Bitcoin, then buy it. While dips may be appealing if you have cash available, hope is not a strategy for gaining exposure. As Cuban's quote goes, "I want Bitcoin to go down a lot further so I can buy some more."
SEC Sues Do Kwon
The US Securities and Exchange Commission (SEC) has filed a lawsuit against Terraform Labs, the company behind TerraUSD, a crypto stablecoin that collapsed last year, allegedly offering and selling unregistered securities and conducting fraudulent activity. TerraUSD's implosion led to a domino effect across crypto markets, fueling bankruptcies in high-profile companies. The SEC's case is significant in its regulatory crackdown as Wall Street's main regulator is effectively asserting jurisdiction over certain stablecoins. The case against Terraform Labs and its co-founder, Do Kwon, is also ratcheting up pressure on Kwon, who has received an SEC subpoena in a separate matter in 2021.
Once again, the SEC has failed to protect consumers and is attempting to collect a fine after the fact.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.