Blockware Intelligence Newsletter: Week 129

Bitcoin on-chain analysis, mining analysis, macro analysis; overview of 4/20/24 - 4/28/24

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1. Bitcoin Shows Resilience in the face of Hostility

All things considered, BTC has held up incredibly well given the flurry of negative headlines this week (which we’ll dive into). BTC is essentially flat over the past five days, sitting at ~$64,800. It’s now been about two months of choppy, sideways price action since BTC breached its previous all-time high in early March. Over the past year and a half, prolonged sideways price action has always been followed by a violent move up. It’s unlikely that this time will be any different; sit tight.

2. Samourai Wallet Prosecuted by United States DOJ

The FBI & the IRS-Criminal Investigation Unit announced on wednesday that they have arrested the founders of Samourai Wallet, Keonne Rodriguez and William Lonergan Hill. Rodriguez and Hill are each being charged with conspiracy to money launder and conspiracy to operate an unlicensed money transmitting business. These charges carry a maximum prison sentence of 20 years and 5 years respectively. In the press release, the DOJ cites multiple social media posts and other marketing material in which Samourai allegedly encourages “illicit activity.”

Without haste, the Bitcoin community has voiced their support for Samourai. Samourai offered a service known as “mixing”; which allowed users to batch transactions in order to increase the privacy of their activity on-chain. Bitcoin is a transparent, public ledger; all transactions are visible. It’s not unreasonable, nor is it indicative of criminal activity, for a user to want to add a layer of privacy to their transactions. When sending BTC to someone else, you may not want them to trace your coins back on-chain and discover that you have a large amount of BTC, opening you up to theft and five-dollar wrench attacks. Privacy is not a crime.

3. FBI Warning

Furthermore, the FBI issued the following formal warning against “using cryptocurrency money transmitting services that are not registered as money services businesses.” The language used in this announcement could very easily be interpreted as a threat against Bitcoin self-custody. In the eyes of bureaucrats hostile towards bitcoin, someone holding their own keys and running their own node could be classified as a “money transmitting service.”

4. Phoenix Wallet & MetaMask

Samourai is not the only entity under fire from the Feds, MetaMask, the popular Ethereum self-custody wallet, is now in a legal battle against the SEC. The attack on self-custody became even more apparent Friday morning. Phoenix, a Bitcoin lightning wallet, announced that they will be removed from the app store in the United States effective May 3rd.

5. Proposed Capital Gains Tax Increase

To round out a week of negative headlines, the 2025 budget proposal from the current White House Administration would increase the top marginal tax rate on long-term capital gains to 44.6%. Moreover, the proposal includes a 25% tax on unrealized capital gains. By taxing capital gains, especially unrealized capital gains, you are effectively punishing those who hold assets to protect their wealth against fiat debasement. It’s unlikely that such proposals would get passed into law. But the fact that they're even in consideration is unnerving.

General Market Update

4. GDP Growth Slowing

The Q1 GDP report came out this week showing a 1.6% annualized growth rate, well below forecasted rates. This is two consecutive quarters of slowing GDP growth, and the lowest growth rate since the 2nd quarter of 2022. This slowing growth is taking place in spite of the fact that CPI, The Federal Reserve’s preferred measure of inflation, has remained elevated, and will not get to their coveted level of 2%. It appears that the US economy is on an unavoidable path towards stagflation; which is the last thing the Federal Reserve wants to see.

Stagflation: “persistent high inflation combined with high unemployment and stagnant demand in a country's economy.”

5. Stagflation

How is this happening? You may remember your college econ professor teaching you that you can’t possibly have a slowing economy and rising inflation at the same time. Turns out, they were wrong.

The lagged effect of the fastest rate hiking cycle in history colliding with multi-trillion dollar government deficits; two counteracting forces, has brought the economy to stagflation. Essentially, through two different entities, the central bank and the treasury, the government has their foot on the economic gas and brakes at the same time; and they’ve begun slowly letting off the brakes since the Fed paused rate hikes late last year. All of this has come after the largest expansion on the money supply in the history of the US dollar, which took place in 2020 & 2021.

6. Treasury Bonds

Treasury yields shot up with the release of the economic data, as investors rushed out of bonds. 2024 has been an abysmal year for bonds so far. Both the 2 and 10-year treasury yields are on pace to make new cycle highs, which spells trouble for bond holders. The influx of supply courtesy of the US treasury issuing new debt has been the primary driving force behind the bond bear market of this year.

Bitcoin On-Chain / Derivatives

10. Bull Market Drawdowns:

Bitcoin, which has held up incredibly well this week given the hostility from regulators and the underwhelming macroeconomic data, sits ~12% beneath it's all-time high. The chart below provides perspective on just how insignificant this drawdown is in the grand scheme of things. Bull market drawdowns of this size are more than common. The adoption of a new monetary system will not happen without volatility.

11. Supply Last Active 1+ Years Ago

We look at this chart frequently, and that’s for good reason. Price is found at the intersection of supply and demand, and examining the behavior of old-coins gives us good insight into the supply-side of the equation. Most of the circulating bitcoin supply belongs to long-term holders; the only way for supply to meet demand (not counting new supply getting mined, which we’ll get into) is for the price to bid high enough to incentivize holders to part with some of their coins.

When bitcoin rallied back to its previous all-time high, we saw some of those older coins begin to move, presumably to be sold. However, this “bleed” from long-term holders has stopped; 65% of the supply has not moved in a year or longer, and this level is holding. Those who had any interest in selling at current prices appear to have been exhausted. The next leg up shouldn’t be too much longer.

Bitcoin Mining

13. Post-Halving Transaction Surge Brings Mining Revenue to New All-Time High

The halving, a once in every four years event that cuts the bitcoin block subsidy in half, brought a storm of on-chain demand, with daily mining revenue actually reaching new all-time highs on the back of elevated transaction fees, despite the block subsidy dropping from 6.25 to 3.125. Now that ~450 BTC are mined per day, rather than ~900, the amount of persistent sell-side pressure from miners looking to cover their operating expenses is cut in half. This can’t be priced in.

14. Post-Halving Breakeven Prices for Bitcoin Miners

The surge in on-chain transaction fees has since calmed down, and miner revenue has come back to earth. Miners are now earning less than 6 cent per terahash per day, which is approximately the same amount of revenue they were earning at the bottom of the bear market, when bitcoin was at $16,000.

Miners seemingly don’t care, the first-difficulty adjustment post-halving was +2%. And difficulty is expected to increase again at the next adjustment; albeit, we’re still in the early stages of this difficulty epoch.

Despite the crunch in mining revenue, miners with low electricity costs and efficient machines have remained more than profitable; and they’re uniquely positioned to experience outsized benefits when the bitcoin bull market resumes. When hashprice reaches the highs it made during the last bull cycle, incumbent miners will profit greatly.

15. Energy Gravity: At a typical hosting rate today, new-gen Bitcoin ASICs require ~$49,852 worth of energy to produce 1 BTC.

All content is for informational purposes only. This Blockware Intelligence Newsletter is of general nature and does consider or address any individual circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal, business, financial or regulatory advice. You should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.