Archive May 2020

According to a report by the Iranian portal Mehr News on Monday, May 4, Iran's new “Monetary and Banking Law Reform” has been passed in parliament. The main determination of the new law concerns the exchange of the local currency: the "Rial" will be replaced by "Toman" in the next two years. The exchange rate established will be 10,000 Rials for each Toman, with each Toman equivalent to 100 Paresh.

The new law was passed with the aim of combating the hyperinflation that is plaguing the country, motivated both by the Covid-19 pandemic crisis and by the sanctions applied by Western powers, especially the United States. Currency exchange to combat rising prices is a widely used resource in these situations.

Hyperinflation and Bitcoin in Iran

In 2018, Iranian authorities set an official exchange rate at around 42,000 Rial for each Dollar (USD). Many exchange offices still show their prices at the current rate. At the same time, Bitcoin P2P exchange LocalBitcoins registered a sharp rise in the price of Bitcoin in the country. The quotation reached 1,445,658,900 Rials per Bitcoin, which, according to the official exchange rate, represents approximately US$ 34,500, which is equivalent to almost four times the international quotation (US$ 8,860.00 at the time of writing this text).

Such a situation is quite similar to what happened in Zimbabwe in 2019, in which the demand for Bitcoin made its price jump to more than $ 300,000 at the time.

According to Radio Free Europe, the dollar price on the Iranian black market reached 156,000 Rials, almost four times higher than the official price. The Toman will cut four zeros from the current rates but may face the same problems that prevented the Rial from prospering.

Years of hyperinflation in Iran

The sanctions imposed by the United States from 2018, after President Donald Trump withdrew the country from the nuclear agreement with Iran and the European Union signed in 2015, started the current period of hyperinflation and economic problems. More recently, Iran's struggle to contain the coronavirus and the collapse in oil prices has exacerbated existing problems.

Increased Iranian interest in cryptocurrencies led the country to legalize mining activities in July 2019. Other countries facing hyperinflation used cryptocurrencies to combat the devaluation of their currencies - more recently, Venezuela has seen a new synthetic dollar supported by Bitcoin.

from coindesk.com

“There is no clear understanding where bitcoin will go,” Yuriy Mazur, head of data analytics at cryptocurrency exchange CEX.IO told CoinDesk’s Omkar Godbole. “It may either retrace back to $6,500 or reach $10,000.”

With the near-term picture cloudy, some analysts are focusing on a longer-term trend that could be surprisingly bullish for bitcoin: the emergence of digital currencies issued by central banks. 

It’s not an obvious investment thesis because bitcoin was invented to be used in an electronic peer-to-peer payment system that would be free of government control and operate outside of the traditional banking system. 

And most central bank digital currencies, or CBDCs, would, by their very nature, be issued and controlled by governments, and in many cases distributed through banks. 

But Jack Purdy and Ryan Watkins of the research firm Messari wrote last week in a report that the “coming digitization of money,” including the launch of CBDCs, could provide a “secular tailwind” for bitcoin. 

Bitcoin price is caught in a downdraft after a series of rallies in recent weeks that repeatedly fizzled out at the $10,000 mark. 

CBDCs have gained momentum over the past year as countries consider whether to roll out digital versions of their currencies to keep up with Facebook’s proposed Libra and China’s forthcoming digital currency electronic payment, which is already in testing.

The journal Central Banking, which is supported by the Bank of International Settlements and the European Central Bank among others, found in a survey earlier this month that some 46 countries are considering CBDCs using a constrained form of distributed ledger technology. 

Federal Reserve Chair Jerome Powell told Congress in February the U.S. central bank is in the early stages of researching digital currencies, and that having a “single government currency at the heart of the financial system is something that has served us well.” 

Even so, JPMorgan said last week in a report that “there is no country with more to lose from the disruptive potential of digital currency than the United States,” as reported by Bloomberg News. “This revolves primarily around U.S. dollar hegemony.” 

The largest U.S. bank’s warning merely reinforces the urgency and significance of the efforts, and that’s what the Messari analysts were homing in on. 

“Catalyzed by bitcoin and the recognition of the benefits of blockchain technology, many countries and companies around the world have begun researching, testing and launching their own digital currencies,” the analysts wrote. 

“When these projects launch, they will have the combined effect of exposing billions of people to cryptocurrency-related technologies,” according to the report. “This will increase people’s comfort with and understanding of cryptocurrencies, get more people creating and using cryptocurrency wallets, and provide on-ramps into decentralized cryptocurrencies like bitcoin.”

So CBDCs might be used to facilitate purchases of bitcoin? That’s the idea.

Two companies specializing in the sale of crypto have recorded technical blockages during the sudden devaluation of cryptocurrencies and the race for crypto. Will it be a technological problem or just the effect of over-leveraging crypto.

In cryptocurrencies, the past week is hardly out of the memory of investors: from 12 to 13 March, the value of bitcoins recorded losses of 40% - the highest ever recorded in the last seven years. But an evil never comes alone: “infected” by the effects of Covid-19, the investment products that are based on the expectations of appreciation of the various cryptocurrencies (Bitcoins and Ethereum, but there are many more) have collapsed. Despite the increase in the margins charged by the virtual exchange offices, which are known in the jargon as “exchanges”, there was a rush to raise these financial products. Result: according to CryptoCompare's monitoring, more than 30 billion dollars will have been withdrawn from the largest exchanges in the world in the fateful 24 hours between 12 and 13 March. And the bad news didn't stop there.

With such volatility of values and multiple investors eager to raise the money invested in financial products to minimize losses or to, as is typical, buy the same products again, but at lower prices to temporarily escape depreciation, the platforms of the “ exchanges ”have started to show that they may not be robust enough to support a global scale business.

Gemini, a virtual exchange office based in New York, is said to have been one of the first to show signs of technological blockade: according to Reuters, the American “exchange” was inoperative and without supporting transactions for more than 90 minutes. The same Reuters also reports that BitMex, which is based in the Seychelles islands, had no better luck: two 45-minute stops.

"It is important to see the evolution that the value of gold will have. If that value goes up, and that of crypto assets does not rise then we can conclude that crypto assets have no strength as refuge assets "

FRED ANTUNES, APBC CHAIRMAN

The Gemini representatives justified the stop with a precautionary measure that allowed them to solve technical problems before returning to the activity. BitMex's justifications are capable of generating more alarm: according to this “exchange”, the failures in operation were due to blocks generated by cyberattacks, which use denial of service (DDoS) methods, which made the transmission of purchase orders unfeasible or sale of assets associated with cryptocurrencies.

Coincidence or not, the alleged cyberattacks on Bitmex occurred at the time of the greatest influx of asset purchase and sale orders - which raised the question regarding the resilience of the infrastructures and platforms used by the exchanges, which operate all over the world. , eventually, without the technical requirements that are required of stock markets or conventional brokers. This, in the opinion of some analysts, makes it difficult to standardize prices and to direct transactions among the millions of investors scattered around the world.

Fred Antunes, president of the Portuguese Association of Blockchain and Cryptocurrencies (APBC), recalls that also in the traditional markets there have been major breaks and devaluations and relates the plummeting of bitcoins, as well as crypto and cryptocurrencies in general, with the impact generated by Covid-19 in the world economy. "People started to sell everything they had and in crypto too", says the cryptocurrency expert.

The devaluation in parallel with the fall registered in traditional markets may have revealed a new facet of cryptocurrencies and financial products that result from them: unlike what happened in other financial crises, this time, bitcoins and the like did not function as a “safe asset”, which makes it possible to keep capital on hold while the crisis affects the values ​​of traditional financial products.

A week after devaluing 40% and starting to be traded at just over $4000, Bitcoins have already recovered beyond $5000. Fred Antunes reiterates that crypto assets are recovering faster than financial products in traditional markets.

“It is important to see the evolution that the value of gold will have. If that value goes up, and that of crypto assets does not rise, then we can conclude that crypto assets have no strength as refuge assets”, says the president of APBC, noting that the average recovery of value in assets, in general, has not exceeded both by percent, while that of crypto assets is already around 12%, as it involves smaller volumes.

Fred Antunes relativizes the alleged technical limitations of the infrastructures that support cryptocurrencies - and links the abrupt devaluation of the last few weeks to the conjuncture that may have been aggravated not only by Covid-19, but also by the failure of Chinese investment programs in cryptocurrencies.

“The market“ crashed ”in its entirety. Each crypto can have a different infrastructure, but they all had the same behavior, which ended up infecting investors who were led to selling to buy later”, analyzes the cryptocurrency and blockchain expert.

Regarding the blockages registered in BitMex and Gemini exchanges, Fred Antunes admits that this is a situation in which the market tries to get rid of situations that are not always the healthiest, such as the leverage of 300% to 400% that they are carried out by the financial products created by some “exchanges”.

 “I'm glad BitMex stopped. Eventually, it might even be good for exchanges like BitMex to close”, he concludes.

The main Chinese political advisers have proposed a regional digital currency for Asia. At first, stablecoin will be backed by four major currencies: the yen (Japan), the won (South Korea), the Hong Kong dollar, and the yuan (China).

The People's Bank of China (PBoC) will lead the project. The basket of currencies would follow the model of special drawing rights (SDR) of the International Monetary Fund (IMF). In this model, the currency of each country is given different weight, based on the size of its economy.

Undeniably, the proposal resembles Facebook's original Libra vision. The currency emerged as a stablecoin based on a basket of fiat currencies. However, Libra abandoned these plans and will now support individual tokens.

According to its supporters, the new stablecoin would help facilitate trade between the four countries, which will be essential for the economic recovery in the region after the coronavirus. In addition, it aims to improve cross-border settlement and clearing services by creating a new payment network and digital wallet for companies.

US fund involved in the creation of stablecoin

The proposal was presented by Neil Shen. Shen is a founding partner and manager of Sequoia China and a member of China's upper house. He presented the proposal to Chinese lawmakers during the Two Sessions, the country's largest annual political meeting.

In addition to Shen, nine other councilors, who are also members of the upper house, signed the proposal. St. Kennedy Wong, a lawyer with the Hong Kong Supreme Court; former Hong Kong Chief Secretary Henry Tang; and Chinese billionaire Songqiao Zhang, from Hong Kong.

California-based Sequoia Capital, the parent of Sequoia China, is one of the few large venture capital companies that have ventured into the crypto market. It invested US$ 10 million in the Huobi Group, the controlling group of the Huobi exchange when it was headquartered in China in 2014. Currently, the Huobi Group is based in Singapore.

The regular issuance of new Bitcoins was cut in half this Monday, repeating a programmed phenomenon that has not happened since 2016. As expected, the “paid” remuneration for each set of transactions processed (block) is now 6.25 Bitcoins.

At stake is a phenomenon known as halving, foreseen in the code that makes Bitcoin work and that is repeated every four years. This technical event aims to gradually reduce the speed of issuing new units of the currency, eventually until 2140, the year in which the maximum offer of 21 million Bitcoins circulating in the market should be reached.

The halving took place at 8:23 pm on Monday, May 11, in line with what was widely anticipated, at the moment when the set of transactions number 630 thousand was processed. Bitcoin's value, which has been rising in anticipation of this phenomenon, is falling 3.06%, to $8,497.45, after the $10,075 peak reached last week and almost three years after the historic high of almost 20,000 dollars reached in late 2017.

From here, the activity of mining Bitcoin - a decentralized process in which millions of computers try to solve complex mathematical equations by trial and error and in which the “winner” processes the transaction and gets paid for it - becomes more complex and less attractive than return on investment point of view.

Halving may continue to influence Bitcoin price in the coming days

Excluding the historic day of December 17, 2017, when Bitcoin touched highs of almost $ 20,000 a unit, this Monday, May 11, has been considered by some specialized media as the “most important date” for the future of Bitcoin. But to understand why, it is important to first understand how the most famous cryptocurrency in the world works.

Bitcoin repeats rare phenomenon that reduces cryptocurrency supply

As ECO has already explained here, Bitcoin is based on technology developed by an anonymous, or anonymous, introduced in 2007 and called blockchain. Because it is not regulated by a central bank, Bitcoin was designed to work in a decentralized system, in which millions of computers around the world process transactions by solving, by trial and error, complex mathematical equations.

The more computers connected to the network, the more complicated these equations get. This is also the mechanism that allows the introduction of new Bitcoin units on the market: whenever a block is processed (in slang it is said “mined”), the transactions that are part of that block are completed and the owner of the computer responsible is remunerated with a fixed amount of Bitcoin - otherwise, they would have no incentive to carry out this work, which in addition to scale, requires huge amounts of electricity.

Since mid-2016 and until this Monday, that fixed amount was 12.5 Bitcoin units, which corresponded to about $112,500 with reference to a unit value of around $9,000, the price that was around Bitcoin in the last days. Now, this Monday, after having mined Bitcoin block number 630 thousand, the cryptocurrency system reduced from 12.5 to 6.25 units the “paid” remuneration for those engaged in the activity of “processing” these transactions, as expected.

This technical event is known as halving, which means that the remuneration for processed block halves. It happens periodically, every 210 thousand blocks processed, or about every four years, and has always been provided for in the code that allows Bitcoin to work.

The “mecca” of global Bitcoin mining is without power.

China's Sichuan region, which concentrates most of the world's Bitcoin mining farms, is in short supply. As a result, miners are being forced to shut down their equipment.

Late rains

The lack of energy in Sichuan has been due to a delay at the beginning of the rainy season in the region. Thus, with a lack of rain, hydroelectric dams in the region operate with less capacity. Therefore, they are unable to generate energy in abundance to meet all the demand from miners.

According to a local government warning, released on May 18, the electricity load in the region has increased by 22% since May. However, the flow of water in local rivers has decreased by 20%, resulting in a deficit in the supply of hydroelectricity.

Under such circumstances, some areas may experience energy shortages during periods of peak demand. In addition, prolonged high temperatures further aggravate tension.

In this context, the document highlights that, although they manage to increase the supply of energy, the authorities would strengthen the monitoring of demand.

Although Bitcoin mining is not specifically mentioned in the notice in which operations are being monitored, it is an activity known for its dependence on an intensive use of electricity.

Bitcoin is not a priority

In the midst of this scenario, the local government has carried out actions that show that Bitcoin mining is not a priority in the region when it is necessary to “choose” who should use electricity.

Thus, according to some local mining farm operators, the delay in the rainy season has caused part of the power supply for Bitcoin mining operations to be “diverted” to serve residents and local businesses.

“Some farms have been out of power for more than three days and others can only be turned on during the night. Areas near the capital of Sichuan, Chengdu, such as Wenchuan, are experiencing severe power outages, while remote places like Ya’an and Kangding, with little electricity demand and sufficient rainfall, have few power outages”, said miners.

For miners, the unstable factors of the rainy season are well known and mining during this period is a risky business. The 2019 rainy season tortured miners as it started without rain in the first month and then storms ruined many farms.

For now, access to energy is the biggest impediment to Bitcoin mining. If the rainy season in the mining capital of the world refuses to arrive, more farms will be forced to shut down their machines. It remains to be seen to what extent the hash rate and mining difficulty of the Bitcoin network will be influenced.