On a special New Year's 2020 episode of The Tatiana Show, Tatiana invited her friend Lisa Loud onto the show. Lisa worked for many years in payments for PayPal and recently has become a leading voice in the crypto world of trading working with companies such as BitMex, Coinsquare, Gemini, and Binance.
Tatiana gets Lisa's take on some of the hot topics in the world of cryptocurrency such as:
What is the potential of central bank digital currencies to replace current fiat currencies and could it create the same problems of the present system of devaluing the money supply via inflation?
What is going on with stable coins and why is it not a popular term anymore?
What does the future hold for exchange-issued currencies such as BNB and will this be a good business model?
Lisa gives her take on if she foresees any key regulation changes in 2020, the trends in the IEO market, the likelihood if the courts will provide some clarity on the definition of security in regards to the token/crypto context.
Tatiana gets her thoughts on a realistic timeline for mass usage of cryptocurrency, how the payments ecosystem such as PayPal and Western Union are being affected by digital currencies and why many people are talking more about blockchain these days instead of Bitcoin.
Be sure to check out Crypto-Cares to learn more about the live acoustic record Tatiana is recording in January 2020 with a later spring conference that focuses on relief efforts for the Bahama islands from Hurricane Dorian and also education of cryptocurrency and blockchain.
About the Guests:
Lisa Loud has been a leader in fintech since 2008. Lisa led strategy at BitMEX from 2017 - 2018, driving an increase in revenue from 100k to 83M. Previously, Lisa led digital acquisition at PayPal for the merchant side. Early in Lisa's career, she worked as a software developer and manager for Apple and Oracle. Lisa holds a B.S. in Applied Mathematics and received her FinTech certification from Oxford Business School.
*You have been listening to the Tatiana Show. This show may contain adult content, language, and humor and is intended for mature audiences. If that's not you, please stop listening. Nothing you hear on The Tatiana Show is intended as financial advice, legal advice, or really, anything other than entertainment. Take everything you hear with a grain of salt. Oh, and if you're hearing to us on an affiliate network, the ideas and views expressed on this show, are not necessarily of the those of the network you are listening on, or of any sponsors or any affiliate products you may hear about on the show.
The year is coming to an end, and a lot of people have started thinking about minimizing their tax burden. If you’re a bitcoin investor, things get even more complex. The IRS recently sent out 10,000 letters to cryptocurrency investors, and this is an indication of how serious they are when it comes to cryptocurrency tax compliance. This means that bitcoin investors need to make doubly sure that they’re filing their returns as accurately as possible. At the same time, they also need to find legitimate ways of minimizing their bitcoin taxes.
Let’s look at some things you can do to save your precious gains in April.
Tax-Loss Harvesting: Turn Your Losses Into Tax Profits
This is one of the best loopholes in current crypto regulation that you can leverage to reduce your tax burden. Let’s say you’ve made significant profits from crypto trades through the year. However, the current value of the bitcoin you hold is extremely low. You can simply sell your current bitcoin holdings at this low price. This will trigger capital losses that you can then set off against your profits. In fact, you can even use these losses to offset future gains and ordinary income (up to $3,000).
But what if you want to keep holding onto your bitcoin in the hope of future appreciation? Well, if you are based in the U.S. then you can simply buy it back afterward.
Note that some countries use Wash-Sale rules that prevent re-buying sold assets right away. For example, in Canada, a special Superficial Loss Rule kicks in whenever you sell at a loss — essentially preventing you from reducing your crypto taxes if you buy the assets back within 30 days. There is a similar rule in the U.K. as well. However, since the U.S. treats crypto as property, the Wash-Sale rule that applies to tax-loss harvesting in securities doesn’t apply to crypto.
You may have noticed that, at the time of publication, bitcoin is trading at fairly low prices, and many believe this might be because big investors are leveraging tax-loss harvesting and selling their holdings. So, if you are sitting with unrealized losses, now could be a good time to sell.
Keep Accurate Records and Avoid Costly Mistakes
One of the biggest reasons why people tend to overpay crypto tax is that they don’t have accurate records of their trades. Given that crypto investors can do hundreds of trades in a year, record-keeping can be quite a chore. This becomes more complex because exchanges don’t necessarily keep records for everyone. For instance, Coinbase only issues a tax form statement to users who have realized gains in excess of $20,000 and undertaken more than 200 transactions.
Many exchanges do allow you to download your transaction files, though, and people generally rely on these to do their bitcoin taxes. However, if you are not careful you could easily end up overpaying. Here are two of the most common mistakes that people tend to make:
Mistake #1: Treating Transfers as Taxable Events
First, there may be some transactions that are simply a transfer of cryptocurrencies from one wallet to another; but if you miss out on this, they may appear to be two separate transactions — and you will end up paying double the tax.
Let’s say you buy 1 BTC for $7,000 on Binance and later move the funds to your private BTC wallet. A few days later, you transfer the BTC from your private wallet to your Coinbase account and sell it for $7,200. So this is just one transaction, with capital gains amounting to $200. However, if you have not kept records clearly, your accountant may get confused during tax season and look at the two transactions as distinct from each other. As a result, you could end up paying taxes first on the withdrawal from Binance and again when you sell the assets on Coinbase.
Mistake #2: Not Calculating Your Cost Basis Correctly
Sometimes it becomes difficult to identify the cost of the cryptocurrency that you are selling. Without an accurate cost basis, you won’t be able to deduct the cost of acquiring an asset from the sale price. As per the IRS’s latest guidelines, you are now able to use both Specific Identification as well as FIFO (First In First Out) to calculate cost basis.
If you have records of your purchases and know the cost basis for the holdings in your different wallets, then you can make tax-efficient sales by selling coins with a high cost basis first. However, if you have no idea how much you bought the coins for, then you will just have to apply the FIFO rule which gives you no control over the cost basis and could result in higher taxes.
The Bottom Line When It Comes to Bitcoin Taxes
There’s still time to get on track before the year ends. Get your records in order and sell your holdings to leverage tax-loss harvesting — you’ll find that your end-of-season tax bill is a lot less steep than you expected. If you’re feeling overwhelmed and need expert help, consulting with a CPA who understands cryptocurrencies and bitcoin taxes might also be a good idea.
This is an op ed by Robin Singh. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.This article is for information purposes only and should not be construed as tax advice. Consult with a tax professional to assess your own individual tax requirements.
Bitcoin Magazine is proud to be the longest running source for Bitcoin information; but we couldn’t do it without contributions from the Bitcoin community itself.
This past year alone, more than 30 knowledgeable and passionate Bitcoin enthusiasts of different backgrounds and areas of expertise have published opinion pieces with Bitcoin Magazine. Our readers have benefited from their insightful articles on a wide variety of topics.
Below is a list of op eds from 2019 — check out the ones you might have missed or reread a few favorites. Perhaps you’ll be inspired to write one of your own. Bitcoin Magazine strives to reflect the viewpoints of the Bitcoin community as a whole and welcomes contributions from our diverse readership.
El Salvador is a country gripped by gang violence. It consistently ranks among countries with the highest murder rate per capita and is one of the deadliest countries in the American subcontinent. Gangs are prolific, and unlike other Central and South American countries, the drug route through Central America misses El Salvador, so instead, the gangs here turn to extortion and murder.
Jobs are scarce, and a considerable percentage of men leave the country in search of work, others are pulled into gang life, imprisoned or murdered. The breakup of the family and the difficulty of finding a job makes recruiting new gang members easy, perpetuating the gang culture.
Bitcoin Beach is trying to help. The organisation is building a Bitcoin economy in Punta Mango, a small beach town in El Salvador. Bitcoin Beach offers free Bitcoin classes and pays young people in Bitcoin to do work such as clean the polluted rivers and streets and stay in education. Local businesses are incentivized to accept Bitcoin, creating a local Bitcoin circular economy.
In this interview, I speak to Michael Peterson founder of Bitcoin Beach, to discuss the project, creating a Bitcoin economy, custodial vs non-custodial solutions and the gangs and violence that plague El Salvador.
Held in June, the V20 Summit was a chance for the industry to respond to a highly controversial set of recommendations handed down by the Financial Action Task Force (FATF).
Ethereum co-founder Jeff Wilcke admitted he has sold 90,000 ETH. The transfer, which carried the large stash of ETH to the Kraken exchange, sparked fears the coin may slide in the coming days, erasing more of its value by the end of the year.
Managing crypto-assets can be an anxiety-inducing experience for a lot of people. While it's quite empowering to 'œbe your own bank,' it's also scary for a lot of people who understand the risks associated with self-custody. Although cryptocurrency wallets have made tremendous progress since the days when a full-sync of the blockchain was required, there are still significant hurdles that limit broad adoption.
This conversation on the future of wallets at SF Blockchain Week Epicenter conference includes Taylor Monahan of MyCrypto, David Gold of FIO Protocol, Dan Finlay of MetaMask, and Ouriel Ohayon of ZenGo. They discuss design, app store policies, and the evolution necessary to enable more people to send, receive, and manage their tokens confidently. The panel is moderated by Epicenter host Sebastien Couture.
Topics discussed in this episode:
Advancements in the usability of cryptocurrency wallets over the last year
The importance of mobile-first development
Frustrations with iOS and Android app stores
How to make developing wallets economically feasible
The December 2019 report on the Bitcoin mining network from CoinShares Research, a division of the digital asset management firm, presented an industry in good health at the end of the year, with a hash rate that had almost doubled in the previous six months, a new generation of more powerful and efficient technology on the market and the continued use of sustainable, renewable energy.
The report indicated that, at this year’s average bitcoin price, fee ratio and block frequency, miners were on their way to making $5.4 billion in total revenue for 2019, down slightly from 2018, but significantly up from $3.4 billion accrued in 2017.
“Unlike the period leading up to our previous report, these last 6 months have been relatively calm in terms of large-scale structural changes,” per the report. “Whereas the period between November 2018 and June 2019 witnessed a large number of bankruptcies and capital transfers, the development of the last 6 months has been mainly one of expansion.”
As the bitcoin mining sphere builds on this positive momentum from the end of 2019 and heads into 2020, factors like the increasing hash rate, new hardware, the upcoming reward halving and more will determine how the industry, and Bitcoin in general, grows.
Good News for the Bitcoin Mining Hash Rate in 2020
CoinShares reported a “huge increase” in the mining hash rate which nearly doubled in the last six months from approximately 50 exahashes per second (EH/s) to almost 90 EH/s, having peaked at more than 100 EH/s.
The report attributed this increase to a combination of the availability of a new generation of more powerful, efficient mining equipment and strong average bitcoin prices.
In a recent episode of the What’s Halvening podcast, CoinShares Research Director Chris Bendiksen discussed the increase in hash rate, particularly from Chinese operations, which he said accounted for almost 70 percent of the increase. China now accounts for 65 percent of the global bitcoin mining hash rate.
Bendiksen noted that this increase in hash rate was largely the result of improved technology and, since most new mining computers are produced in China, Chinese miners were first in line in getting next generation technology upgrades.
He expects that, as new technology filters into the Western market, the hash rate there will rise as well.
He also noted that there were signs that as Chinese miners upgraded they were shipping their old Bitmain Antminer S9 mining hardware to places like Iran and Kazakhstan.
Blockstream CSO Samson Mow, whose company has mining operations in Quebec, Canada, and Adel, Georgia, agreed with Bendiksen’s optimistic outlook for 2020.
“Bitcoin’s network hashrate will keep climbing as miners switch out older equipment with newer and more efficient models,” Mow told Bitcoin Magazine.
Will China Continue to Dominate Bitcoin Mining in 2020?
As noted above, the CoinShares report indicated that “as much as 65% of Bitcoin hash power resides within China — the highest we’ve seen since we began our network monitoring in late 2017.”
Despite the growth of bitcoin mining around the world, in places like North America, Russia and the Middle East, China still dominates the industry. Some may view this as a concern, especially as the dominance appears poised to grow entering 2020, as it centralizes one of Bitcoin’s most critical industries.
For Mow’s part, China’s dominance is certainly something to note, but ultimately he believes it is “a non-issue.”
“I wouldn’t be concerned about China’s dominance in Bitcoin mining,” Mow said. “The main advantages of mining in China are faster setup times and lower initial CapEx which, along with closer proximity to where ASICs are assembled, have driven industry growth there … Now that we have mining infrastructure built up in North America, like with Blockstream’s mining operations and others, the CapEx advantages are less important, and we have the additional benefit of lower electricity costs.”
The CoinShares report noted that there has been a major “policy switch” on the part of China’s government, going from listing mining as an undesirable industry as recently as April 2019 to removing mining from this list completely (although bitcoin itself is still illegal).
Still, Mow does not see China’s dominance as a priority issue for 2020.
“Mining in China is still done by individuals and corporations, just as mining in North America or any other location,” Mow said. “Also, the concept of ‘Chinese hash rate’ is misleading because there are non-Chinese individuals and companies mining in China, just as there are Chinese miners in North America.”
How the 2020 Halving Will Impact Bitcoin Mining
For this article, Bitcoin Magazine reached out to a number of bitcoin mining industry leaders and CEOs about their priority issues for 2020. Several mentioned the upcoming Bitcoin halving (or “halvening”), expected in May 2020, as something to watch.
“The halving is going to be the most impactful factor to mining in 2020,” Andrew Kiguel, CEO of Hut 8 Mining, said. “All miners should be preparing for what happens and there are several possible outcomes. As the reward drops from 12.5 to 6.25 [BTC], less efficient miners will be forced to evaluate operations.”
Regarding bitcoin mining hardware, the CoinShares report indicated that “going into the reward halving in the spring of 2020, older gear such as the venerable Antminer S9, which is still widely deployed in the network, will likely be approaching the end of its useful lifetime unless the price of Bitcoin rises dramatically, or indeed if more operators gain access to electricity around or below ¢1/kWh.”
The bitcoin mining hash rate will be affected as well. On What’s Halvening, Bendiksen said that if the price of bitcoin stays about the same, “you will see a drawdown in the hash rate of 50 percent” with some companies closing down. But if the bitcoin price doubles, then the hash rate will be back to where it was.
When it comes to the halving and its impact on price, Mow remains optimistic.
“This upcoming halving will see the daily supply of bitcoin drop from 1,800 to 900,” he said. “With overall general awareness of Bitcoin being much higher, and exchange on-ramps being far more mature than four years ago, I’d expect to see a price increase — if not exactly at the time of the halving, then in the months to follow.”
Ultimately, the halving will impact all primary indicators of bitcoin mining in 2020: the equipment used, hash rate and price. But the extent to which the mining industry is affected is still to be determined.
“Will the network hash rate drop significantly after the halving?” Kiguel asked. “I believe it will, as miners using older equipment will no longer be viable. Will the price of bitcoin rally in response to the halving … or is it already priced in? I think we will see a bump in the price, however, perhaps not as high as some are expecting. Perhaps a 50 to 100 percent bump from current levels.”
Naturally, the halving and its expected impact is top of mind for every significant bitcoin miner as 2020 begins.
“In order to maintain current mining economics pre- and post-halving, BTC prices will need to increase substantially, or there will be a dramatic decline in network hash rates as higher cost miners unplug their hardware,” Bitfarms CEO Wes Fulford said. “Bitfarms is well positioned to withstand any short-term volatility in mining economics based on our low cost structure, access to competitively priced electricity and new generation mining fleet.”
Will Mining Technology Continue to Evolve in 2020?
Bendiksen noted on What’s Halvening that the evolution of mining technology is continuing at a pace greater than ever as mining hardware companies like Canaan and MicroBT are competing more closely with hardware giant Bitmain.
And as companies like Canaan and Bitmain apply for initial public offerings in the U.S., the hardware market will become even more decentralized in 2020.
In its report, CoinShares listed the main players in the manufacturing market at the end of 2019 as Bitmain, with its Antminer 15 and 17 series; MicroBT, with its Whatsminer 10 and 20 series; Bitfury, with its latest Clarke chipset; Canaan, with its Avalon 10 series; Innosilicon, with its T3 unit; and Ebang, with its E10 model.
“These new models produce as much as 5x the hashrate per unit as their generational predecessors, which means that even though on a unit-basis, several producers report solid sales of previous-generation models, on a hashrate-basis, Bitmain and MicroBT have delivered the vast majority of new capacity to the network,” according to the report.
It shouldn’t be a surprise that Fulford recognized the importance of using the latest and most efficient technology in 2019, which could set Bitfarms up to have an even more productive 2020.
“We added 13,300 new generation miners which has resulted in a 291 percent increase to computational hash power this year,” he said. “New-generation miners now represent 73 percent of our installed computing power which positions us as one of the most energy-efficient cryptocurrency miners in the public markets.”
“Throughout 2020 and going forward, we remain focused on running the most efficient hardware and maintaining extremely high power usage efficiency ratios, key fundamentals to maintaining operational profitability,” Plouton CEO Ramak J. Sedigh told Bitcoin Magazine.
But this investment in the latest technology does, of course, depend on the ongoing profitability of bitcoin mining in 2020. To this end, Sedigh explained that his biggest concern is whether bitcoin will be able to maintain a steady price.
“The case for any mining operation, and so the success of the industry, really is dependent on the stability of bitcoin,” Sedigh said. “We plan to survive the extended lows, but we need to keep higher averages so the traditional investors feel confident investing in bitcoin-related projects. To that end, my bigger concern is price manipulation, because at an estimated $150 billion total market cap, bitcoin is easy to manipulate through the exchanges, which contributes to volatility.”
Looking ahead to 2020, bitcoin mining will not be for the faint of heart, as price volatility is still a big unknown, CoinShares reported.
On What’s Halvening, Bendiksen marveled at the risk takers who are prepared to invest billions of dollars into bitcoin mining despite many question marks. Any risk analysis, he said, will tell you it’s a high-risk enterprise and yet, based on the actions of its participants, bitcoin miners clearly have faith in bitcoin and the network.
Virgil Griffith is slated to be released to his parents home in Alabama pending some pre-release conditions, after a ruling by the Hon. Vernon Broderick in in New York Monday. “Laws in this country are not suggestions,” Judge Broderick told the accused Ethereum Foundation developer as the hearing began, according to a tweet thread from […]
For almost a decade, Bitcoiners from all across the world have celebrated January 3 as Bitcoin’s bonafide birthday. It was on that date in 2009 that Satoshi Nakamoto mined Bitcoin’s genesis block and it was this first successful hash computation that defined the political purpose of Bitcoin with the embedded message: “The Times 03/Jan/2009 Chancellor on Brink of Second Bailout for Banks.”
Simply put, Bitcoin is an instrument that is specifically designed to resist the inflationary urges of monetary politics, and its qualities empower individuals to become sovereign. However, the business sector that developed and blossomed around Bitcoin has not always remained true to the cypherpunk origins that created it; Often times, exchanges and lending services impose withdrawal limits, freeze accounts and find other ways to arbitrarily restrict users’ access to their funds.
Long-time Bitcoiner Trace Mayer has observed how these businesses tend to restrict the concept of sovereignty that the technology was meant to protect, and his response to the phenomenon is the Proof of Keys event, held every year on January 3 to remind bitcoin holders of the ethos behind the technology.
During the “celebration,” as it’s described on the official website, participants seize back their bitcoin from any third parties they usually trust on their behalf.
“I started Proof of Keys as a celebration of our monetary sovereignty,” Mayer told Bitcoin Magazine in a recent interview. “If you have rights but never flex them, your muscles will get weak. With Proof of Keys, we just withdraw all of our crypto from any third party — be it exchange or lending platform. You withdraw to a node that you’re running (so you do your own validation without relying on somebody else) and you hold your own private keys.”
The event speaks to Mayer’s own noteworthy commitment to Bitcoin’s most cypherpunk ideals, including distrust of third parties, the utmost privacy and security and a relentless emphasis on taking every precaution available to retain control of his bitcoin.
Educating Newbies About Sovereignty
Going a step further for its emphasis on sovereignty, Proof of Keys makes a point to remind bitcoiners of instances when exchanges were hacked or other issues led users to irreversibly lose their funds — even if those bitcoiners haven’t experienced that themselves.
“We have so many people who come into the space and they didn’t lose money in Mt. Gox or other big exchange hacks that have happened over the years,” explained Mayer. “So they don’t necessarily have the ethos, experience and human capital to own their own keys. Proof of Keys is an annual event which helps everybody develop these skills and abilities. It will also help strengthen the network.”
Mayer, who has coined the term “HODLer of last resort” as a way of signalling individual sovereignty, has also expressed his concern over the increasing centralization of bitcoin ownership. In a recent tweet, he pointed out that almost 2,000 BTC are being kept in the custody of nine exchanges, and this trend of embracing trust in third parties is anathema to the philosophy and purpose of Bitcoin.
Proof of Keys acts as a test for exchanges to make sure that they have enough liquidity to handle massive withdrawals from participants and it also emphasizes an educational component. New Bitcoiners are encouraged to run their own nodes, learn proper key management and inherit the philosophical ideals of sovereignty.
“Proof of Keys is a celebration during which we exert our monetary sovereignty, we get to have a lot of fun, and we get to teach new people how to do it,” said Mayer. “It’s important to celebrate that we have this ability — because if we never exercise the ability or do it hazardously, we face the risk of taking exchange solvency for granted. You don’t want to learn and train yourself to become sovereign during a real emergency situation.”
In terms of hardware and software recommendations for individual sovereignty, Mayer is a big fan of general-purpose devices and Bitcoin Core. In his view, somebody who only owns small amounts of bitcoin should simply download and run Bitcoin Core, as it’s one of the most audited and tested pieces of software.
“Newbies in the space should run their own full node and take their cybersecurity very seriously,” he said. “If you deal with small amounts, then it’s recommended to use the Bitcoin Core software, as it’s a full node which allows you to hold your private keys. They built Core to be very secure and robust, and it’s free. As long as you have enough disk space on your computer, you can run it for free. Start from here, and withdraw a small amount to see how it works.”
For more advanced users who want even greater security, Mayer recommends the open-source cold storage bitcoin wallet Armory.
“Armory is like a Swiss Army knife: you can have multiple wallets, you can control the UTXOs on each one of them, and all of this is an upgrade in your ability to interact with the Bitcoin network,” he explained. “You can have your watch-only wallet on the new computer and a cold storage wallet on a computer that you never connect to the internet. Through this software, you don’t need to buy specialized hardware that leaks privacy.”
Other resources and protocols that Mayer endorses for custody and sovereignty are the Glacier protocol (a 90-page guide which explains best security practices) and Smart Custody by Christopher Allen.
Mayer’s recommendation for learning proper key management is practical. In his view, newcomers should approach Bitcoin just like a bicycle: By taking small, low-risk steps to learn and never feeling discouraged when failures happen.
“There is no substitute for getting on the bicycle and riding it,” Mayer said. “You might fall and scrape your knee — if it happens, just get up and get back on the bicycle. Start out small, as you have no business locating to bitcoin more capital than you’re ready to lose. And when you deal with third parties, remember that you will inevitably be disappointed and it will cost you money. The golden rule in Bitcoin says that you can’t trust these third parties: they become massive honeypots and there’s a lot of value to be stolen in terms of both assets and data. At least we have Proof of Keys to generate some discussion, otherwise most people remain ignorant. The price of being ignorant in the Bitcoin space is very expensive.”
What’s the Matter With Hardware Wallets?
Hardware bitcoin wallets are affordable devices that use cryptography and physical security features in order to provide a safer way of holding private keys. Yet in spite of their rising popularity and relative user friendliness, Mayer remains skeptical and critical.
“First of all, I don’t like bitcoin-specific hardware wallets like Ledgers and Trezors — you put a lot of trust in these companies,” he said. “They know that you’re going to be using that device for bitcoins, Amazon knows that it’s in your permanent purchase history, so think about it.”
Mayer’s main concern in regards to hardware wallets isn’t coin security but privacy. As he explains, “Ledger and Trezor can be uniquely identifiable through a serial number, and when they report back home they leak all types of information about your addresses, connection and transactions.”
If the hardware wallet manufacturers store information about how many bitcoin their clients are holding, they become honeypots for hackers and eventually threaten those who trust third parties with their financial security.
“Put on your criminal hat: If you want to figure out where you can find some bitcoins, you go compromise the databases of Ledger or Trezor, and simply go for the people whose devices hold most coins. It’s not very difficult,” argued Mayer.
What’s Wrong With Full Node Products?
In recent years, the concept of “financial sovereignty in a box” has become increasingly popular among newbies. Instead of synchronizing the Bitcoin blockchain on their computers and running complementary applications on top of it, some community members prefer to purchase dedicated plug-and-play hardware. However, Mayer is not a fan of these products due to the fact that users need to blindly trust in the good faith of the service providers.
“I don’t think that you need to spend money on a node,” he said. “I have several old computers and I run Bitcoin full nodes on them. In addition, I can run Bitcoin Core on any of my new computers too.”
As with hardware wallets, Mayer is concerned about leaving permanent trails in regards to interacting with the Bitcoin network (and potentially owning coins). In this regard, he recommends using generic multipurpose computers and hardware that nobody would suspect to be running Bitcoin.
“I like using general-purpose hardware because the sellers from whom I acquire it don’t necessarily know how I’m going to be using it. With a random number generator, it’s less likely to be compromised and it’s less likely that the person who sold it to me will know that I use it for Bitcoin,” said Mayer.
Exchanges, Lending Services and the Importance of Privacy
Mayer recommends that Bitcoiners choose their exchanges with great precaution and also review their privacy policies. While security is very important for traders, the way financial data gets handled is of equal importance.
“You need to be extremely careful with the exchanges that you use, the way that you interact with them and the data that you’re leaking to them,” Mayer said. “We must also remember that Bitcoin is an immutable blockchain and the transactions are there permanently. If you’re leaking data such as IP address, email address or passport scans and it gets attached to different bitcoin UTXOs, you’ve got to be careful and aware of the immutability. The data gets shared around with other companies in the space such as Coinbase, Bitstamp and Chainalysis, so precaution when signing up with your data is essential.”
Furthermore, Mayer presented an essential principle: Third parties can’t be trusted with too much data and the only bits of information that are truly safe from hackers are the ones that never get shared on the internet.
“I like to give to these exchanges and operators the least amount of information and the least amount of privilege. If you don’t give up the data in the first place, it can’t get hacked or spread around,” he said.
Lending services didn’t escape from Mayer’s scrutiny either, as the Bitcoiner has questioned their business models in relation to liquidity, solvency, data retention and commercialization.
“How can lending services pay 7 percent interest while charging only 6 percent for loans?” he asked. “It’s because they most likely also sell data, or don’t deal with their own money. When you demand back your bitcoins from the lending services, you’re going to find out whether they have them or not. When you withdraw your coins from exchanges, you also see if these companies are fair and solvent. This is very important information that you don’t learn until you enforce it.”
The Problem With CoinJoins and Skepticism for Bitcoin Privacy
After attending most of Ross Ulbricht’s trial hearing, Mayer became aware of the U.S. government’s ability to trace transactions on the open Bitcoin ledger and differentiate between coins that have been used for criminal activities and “clean” ones. Consequently, he became very much aware of the importance of UTXO cleanliness and developed a habit of holding taint-free coins.
“I’m not really interested in engaging in CoinJoins because that only complicates the KYC/AML situation and I know that my bitcoins are clean,” he explained. “So why would I want to mix them with someone whose bitcoins are dirty? All of this KYC/AML data has effects on the fungibility of satoshis and you don’t want to become a person of interest in criminal investigations.”
Mayer also implied that anonymity on a very small scale is inefficient and easily breakable, and privacy should exist by default even for users who aren’t aware that they’re using it.
“I think that privacy and fungibility have to be there in the base layer for everybody,” Mayer explained. “Privacy can’t be opt-in — if three out of 100 people are wearing a mask, then it’s simpler to use scrutiny and figure out who the masked people are. But if everybody is wearing a mask, identification becomes more difficult.”
In regards to Confidential Transactions, Mayer suggested that the ability to audit the Bitcoin blockchain and guarantee the limited supply is more important than concealing transaction data.
“What is more important: having a limited supply or the privacy and fungibility?” he asked. “For the first network effect of speculation, I think having a limited amount is more important. In hindsight, I also think that the limited supply is more important for monetary sovereignty than privacy and fungibility. This doesn’t mean that privacy and fungibility aren’t important and it doesn’t mean that we shouldn’t try to take territory through them whenever we can.”
An Airdrop for Proof of Keys Participants?
In order to incentivize Bitcoiners to withdraw their coins from exchanges through Proof of Keys, Mayer thinks it may be a good idea to airdrop special altcoins as a gift.
“I think having an airdrop for Proof of Keys participants would be great,” he said. “These events don’t cost the bitcoin holders anything and you get a new asset. And if these airdropped assets have any value at all, you can always sell them and get more BTC.”
Though he hasn’t fleshed out a complete plan for such an incentive, Mayer thinks that these airdrops can work in two ways: They reward users for withdrawing their coins, but also reward exchanges for proving that they hold all the required liquidity to operate. The resulting altcoin might acquire market valuation and help traders acquire more bitcoin.
“I haven’t put a ton of thought in this idea of having a Proof of Keys airdrop, but if we could use this concept to squeeze value out of the exchanges that don’t provide the keys, then that would be a way for us to perhaps even make some money,” Mayer explained. “The illiquid exchanges that can’t process all withdrawals won’t get the airdrop, so the scarce assets received by the good players can even be liabilities for the exchanges.”
In defense of noncontentious altcoins, Mayer said that they can serve two important purposes that support Bitcoin: They offer a testnet for Bitcoin features (as was the case of Litecoin with SegWit) and also raise the cost of blockchain analysis operations.
“If more coins exist, then Chainalysis must adapt to the magnitude of the market,” Mayer concluded. “We don’t know how profitable it is for them to spy on people at such a great scale, but we can increase the amount of work that they need to do so they can have greater costs.”
Bitcoin is still mostly a speculative asset in the developed world. However, in countries with a history of poor monetary policy, Bitcoin is now a viable hedge against high inflation and government seizure.
Argentina's recent history is one of poor monetary policy. Between 1991 and 2002 the Argentine Peso was pegged to the USD with the central bank claiming to operate a full reserve. This peg was used to combat hyperinflation and initially appeared to work with inflation falling from 3000% in 1989 to 3.4% in 1994.
The reality was very different, and the strong USD overvalued the Argentine Peso and made international trade difficult. In 2001 the dollar-pegged Argentine Peso was abandoned, and the Argentine peso has lost over 98% of its value with 1 USD now buying almost 60 pesos.
With hyperinflation and the capital controls used by the Argentinian government, many locals look to find ways of protecting their wealth with hard assets. While many will use USD and real estate, more and more are turning to Bitcoin as a way to preserve their capital.
In this interview, I speak to Ariel Muslera and Diego Gutierrez-Zaldivar about the current state of monetary policy in Argentina, the political landscape, and how more and more Argentinians are using Bitcoin to hedge risk.
If you're looking to bring up Bitcoin during the holidays or any time over the next few weeks, here are two good strategies in bringing up the subject matter.
A new research paper provides what is perhaps the most informative series of snapshots simulating Lightning Network traffic over the past year.
The paper, titled “A Cryptoeconomic Traffic Analysis of Bitcoin’s Lightning Network,” was written by a trio of Hungarian researchers: Ferenc Béres of the Institute for Computer Science and Control, István A. Seres of Eötvös Loránd University and András A. Benczúr of Széchenyi István University.
Using a Lightning Network traffic simulator created for this research to imitate the network’s flow of transactions, the paper concludes that the current rate of network transaction fees is not economically viable for the long term. In addition to an immature fee market, the paper addresses the tendency of bitcoin senders using the Lightning Network to utilize more direct, less private payment routes. The paper proposes solutions to both perceived issues and, in doing so, raises questions about what the Lightning Network should ultimately be for Bitcoin.
Lightning Network Problem #1: Economic Viability of the Fee Market
The Bitcoin blockchain processes far fewer transactions per second (seven to nine) when compared with institutional giants such as Visa (which processes about 40,000 transactions per second). Even though Bitcoin is certainly not trying to be Visa, this illustrates the purpose of the Lightning Network: to scale Bitcoin. Thus the core idea of Lightning is to allow people to issue bitcoin payments off of the blockchain so that they can be conducted more seamlessly. This reduces processing backlog by creating faster and cheaper payments and also presents an interesting opportunity for better privacy.
The Lightning Network is operated by nodes that run based off of Lightning Technology (BOLT), the foundation of the Lightning Network protocol. Similar to running an on-chain Bitcoin node, Lightning nodes route payments between senders and receivers, in turn reaping a transaction fee for their work.
However, because the Lightning Network is both newer and more private than the Bitcoin blockchain itself, the research paper authors stated in a presentation that “to the best of our knowledge there was no paper on quantifying the financial incentives of LN router nodes.” Their analysis draws from traffic data extracted from 40 consecutive snapshots of the Lightning Network between February and March 2019, and a subsequent estimation simulating that data.
The paper found that, “currently, LN provides little to no financial incentive for payment routing. Low routing fees do not sufficiently compensate the routing nodes that essentially hold the network together.” In their presentation, the authors estimated that daily routing income for major router entities at different levels of traffic volume and payment value is approximately 100,000 sats (about $7) per day.
For clarity, Lightning Network developers set default transaction fees for node operators, they can agree to do this in consensus or act independently for their own Lightning software implementations. However, the node operators can manually adjust their transaction fee rate to whatever they want. The paper called this network-wide inclination for low transaction fees “economically irrational,” but in conversation with Bitcoin Magazine, Seres, a mathematics PhD in Budapest, was quick to admit that the behavior is probably more akin to a kind of altruism seen during the early days of Bitcoin’s on-chain fee market.
Assuming nodes operators want a legitimate return on investment from transaction fees, the paper asserts that the financial incentives in the Lightning Network are not enough. To make payment routing economically viable for node operators, the paper proposes either 1) increasing traffic or 2) increasing transaction fees.
“In this sense, many of the larger nodes can raise their transaction fees because they are in a monopolistic position,” the authors wrote.
This means that, because many of the larger nodes are indispensable due to the proportion of transactions they currently route for the network, “there aren’t many options for neighboring nodes to route payments,” said Seres.
Lightning Network Problem #2: Routing Privacy
The paper also finds that despite randomized onion routing, “strong statistical evidence can be gathered about the sender and receiver of payments, since a substantial portion of payments involve only a single routing intermediary.”
As a potential solution to this privacy drawback, the authors suggest using “deliberately suboptimal, longer routing paths [that] can restore privacy while only marginally increasing the cost of an average transaction.” Additionally, creating a direct payment channel between senders and receivers creates the optimal level of privacy.
Based on the paper’s recommendations, if default transaction fees increase, taking longer, less direct payment paths for privacy will cost more. Similar to the concern with setting a default transaction fee for node operators, and in the spirit of Bitcoin’s earliest developments, this paper’s findings currently put the responsibility of privacy on users selecting their payment routes.
Rationally Low Transaction Fees
Many developers and node operators within the Lightning Network community are not likely to agree with the conclusions of the paper, that low transaction fees are economically irrational or even problematic.
For instance, many Lightning Network node operators are Bitcoin businesses, such as Bitrefill, which allow customers to purchase a wide range of products and services using bitcoin through Lightning Network payments. Businesses like Bitrefill appear to be taking advantage of the Lightning Network’s low transaction fees for the sake of their customers.
“It is entirely short-sighted to assume that Lightning routing is economically irrational if routing fees themselves have a summable cost to participants,” CCO of Bitrefill, John Carvalho, told Bitcoin Magazine. “There are at least two major factors that must be considered. One, that Lightning offers features that onchain Bitcoin transactions do not, like high frequency and instantaneousness. Those are features people are willing to incur cost to access. Two … economic actors have incentives to scale their node activity externally as a business, just like Bitrefill. Demand for commercial-friendly BTC transacting is real.”
Another Bitcoin business taking advantage of the Lightning Network’s low transaction fees is Sparkswap, an app that lets users buy bitcoin with USD directly into a Lightning Network wallet.
“In looking at our routing fees you might assume that we are operating in an uneconomic way, but considering our business as a whole tells a different story,” said Trey Griffith, founder of Sparkswap.
Griffith stated that because Bitcoin businesses are such a dominant part of the Lightning Network’s routing, it’s difficult to draw meaningful conclusions from the paper’s data, like why certain openings create triangular routes.
Griffith agreed that transaction fees will grow over time while Carvalho admitted “they will likely approach on-chain levels overtime … and a rank for rates can be predicted: Bitcoin on-chain > Lightning > Shitcoins.”
Should Lightning Network Transaction Fees Be Raised?
According to Seres, the ultimate harm of low transaction fees on the Lightning Network “would be that maybe nodes would quit the network, and it would lose capacity for payment channels.”
And in October 2019, Rusty Russell, a developer for Blockstream, pointed out another pair of problems with setting low default transaction fees.
In a message to the Lightning Dev mailing list, Russell observed that two-thirds of node operators were “sitting on the default (1,000 [millisatoshi] + 1 [parts per million of the payment (ppm)])” transaction fee. This would imply that the majority of node operators on the Lightning Network do not choose to deviate from default fee rate set by developers.
Russell pointed out that acceptance of the default fees indicated low reliability and that routing gets slowed in trying to find a responsive node. He also noted that “there’s no meaningful market signal in fees,” meaning that the Lightning Network fee market doesn’t look like a real market.
Elaborating more recently on Russell’s point and responding to the paper’s findings, Russell’s colleague, Blockstream researcher and general Bitcoin and Lightning Network enthusiast Christian Decker, told Bitcoin Magazine that “the issue at hand is that the current default fees do not leave much room for differentiation. By increasing the default fees, we’d automatically skew the route selection away from nodes that were just set up and left there unattended.”
Decker also pointed out that the paper seemed to have overlooked that c-lightning implementation already randomizes route selection for senders. Decker said that “due to the randomization in route selection, an increase in the default fee rate would not result in those nodes being excluded from forwarding payments, but we could still skew the routes towards more actively managed nodes.”
Looking Into 2020
While most sources interviewed for this article did not agree with the paper’s conclusions, their concerns did shed light on the Lightning Network of 2019 and what are likely to be major priorities for 2020.
“Since our public testing began a little over a year ago, the Lightning community has built a lot of infrastructure to bootstrap the network and to experiment [with] what works and what doesn’t,” Decker said. “This builds the foundation on which we can build in the coming years, and we expect that many of the upcoming developments will indeed be more user facing. This includes simpler UX and further improved reliability, which can then drive user adoption. We agree with the authors that privacy is likely a major topic in LN for 2020.”
Carvalho also doesn’t see a problem with the Lightning Network’s low transaction fees and projects significant improvements in the coming year.
“In the end, the nature of the network being P2P and voluntary means that arguments against its rationality must refute the reality that the network persists, is growing and being leveraged by businesses today,” he said. “In my view, we’re only scratching the surface and Lightning will demonstrate more uses cases and incentives for participation in 2020.”
Furthermore, Carvalho made the point that the Lightning Network has never made a promise to solve privacy off-chain — that is more a side effect of its privacy-minded culture of engineers and users. And, in the context of on-chain data, “having the ability to watch some money move on Lightning does not imply you have useful external taint to apply to it.”To learn more about what could be coming for the Lightning Network in 2020, you can follow the discussion by subscribing to this Lightning Network developer mailing list.
We will take a non-technical look into bitcoin mining in this episode. My guests are Jan „Œapek and Pavel Moravec, the CEOs and Founders of Braiins, the company that is operating Slush pool, which is the world's first bitcoin mining pool with more than 1 000 000 BTC mined since 2010. Jan and Pavels company is located in the Czech Republic in Prague. They are bitcoiners by heart and explain how pool mining works, what the challenges for miners are to be profitable, share their thoughts about the electricity consumption of proof-of-work and what they believe bitcoin will be in the future.
Coinbase CEO Brian Armstrong has been granted a U.S. patent for a system for users to make crypto payments with email addresses linked to corresponding wallet addresses.
Host Tom Shaughnessy of Delphi Digital is joined by Alex Wearn, the co-founder and CEO of IDEX, a decentralized exchange built on Ethereum, to discuss the next version of the exchange and using optimized optimistic rollups to scale the exchange.
Topics Discussed
IDEX 2.0 - UI improvements (faster and more performant) and a more efficient settlement process with rollups instead of settling each transaction one by one (IDEX users paid $5M in gas fees in 2018).IDEX differs from competitors (Uniswap etc) by having a high performant order book. An on-chain order book is great for integrations, but hard to use when replicating complex trading strategies. In competing with 0x, IDEX disagrees that trying to have a high performant order book may be too difficult if its decentralized.How the different types of rollups work to drive scale for Ethereum, and the differences from normal rollups to IDEX's version called optimized optimistic rollups.Optimized Optimistic rollups can drive much higher throughput vs using traditional rollups. How IDEX grew to been the most successful DEX and dapp to date, with over 300k users executing five million trades worth over $2 billion.The use of optimized optimistic rollups beyond IDEX, such as in gaming.Alex's thoughts on the battle between centralized exchanges (Coinbase, Binance, Bitmex, Delta) vs Decentralized exchanges (IDEX, Uniswap, 0x, etc).
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Disclosures:‚This podcast is strictly informational and educational and is not investment advice or a solicitation to buy or sell any tokens or securities or to make any financial decisions. Do not trade or invest in any project, tokens, or securities based upon this podcast episode. The host may personally own tokens that are mentioned on the podcast.‚Tom owns tokens in ETH, BTC, XTZ, LEO, DCR and STX.‚
While a grandfather clause allows crypto custodians to keep serving German customers without being penalized, those same companies are waiting on financial regulator BaFin to release final regulations around the law.
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