The Rake Review: February 2022
Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.
Summary:
If you are a busy investor that doesn't have time to read this whole newsletter here is a brief summary:
* Russia invades Ukraine and the crisis escalates
* Interest Rates may be forced North in the US as early as March
* Canadian authoritarian control intensifies including seizures of funds
* Bulgaria, El Salvador, Mexico and many other sovereign nations take positive steps for Bitcoin adoption
* Two arrested over Laundering 120,000 BTC ($4.5B USD) in the US
or Read below for all the detail.
War in Europe Once Again...
A commercial flight enters Ukrainian airspace, promptly reverses course, and flies around.
A US Military drone flies back and forth patrolling Eastern Ukraine before leaving.
Twitter - always the first to know. News of imminent war would be confirmed soon after.
Readers of this newsletter may not know that I was born in Moscow, Russia but 2 of my grandparents were born in Ukraine as well as more than half of my great grandparents. Most ex-Ukrainian and ex-Russian Australians get along really well and could be considered one community, almost indistinguishable from each-other. In fact many, like myself, have a background that's mixed and so this war makes little sense except in the context of re-establishing the old iron curtain.
This is not a political newsletter but the loss of life will likely be horrific and I hope for the best outcome humanly possible. Whatever happens the threat of escalation is there and there is risk of contagion.
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Why does war matter for a crypto newsletter? Well, markets efficiently twigged to the fact that war was coming. Below is a graph of the bitcoin perpetual futures contract on FTX:
The price moved from $37,000 to $35,000 very quickly and while it seems to have found a temporary bottom we may see high volatility for quite some time. A rebound would be expected if there is a quick ceasefire but contagion in the form of new entrants to the war or a protracted conflict may mean lower prices.
Other markets are also feeling the same pain. Oil has rocketed to above $100 a barrel and the All ordinaries is down 3% today despite closing at 4pm. Crypto markets never shut though and we can still exit and enter positions.
Is bitcoin a safe haven?
We've seen multiple times that when the proverbial hits the fan bitcoin tends to fall with the other markets, so how can it be considered a safe haven? Well, bitcoin is the most highly liquid and instantly settled of assets and as equities drop investors often sell bitcoin to get immediate cash to firm up equity leveraged loans. That causes a temporary hit but as we've often seen bitcoin tends to rebound and increase its dominance in the aftermath. Assets which are purely speculative however tend to have a large sell off when there is panic in the streets. Don't get caught holding too much DOGE (Down 12% so far today).
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Video of the MonthJon Stewart (ex host of the Jon Stewart Show) interviewed Thomas Hoenig who served as Chief Executive of the Kansas Fed for 20 years. Remarkably Hoenig agreed that 6-7 Trillion has been created out of "nothing" and that the entire system is held together by "confidence in the dollar". Here is link to the 1 minute video on twitter. Here is Milton Friedman - The brilliant Nobel Prize winning economist explaining Money and Inflation in a full talk - as directly related to our video of the month. Milton Friedman the pre-eminent economist of his time, is largely responsible for understanding how monetary policy can be used to smooth market cycles. |
Markets
Prices are very volatile at present with bitcoin dipping below $35,000 USD and ETH below $2,500 USD.
* Top 8 Coins by Market Cap thanks to Coin Gecko
In the NEWS
1. Couple arrested on money laundering charges
Ilya Lichtenstein and Heather Morgan were arrested in February over money laundering charges of $4.5 Billion USD worth of Bitcoin linked to the 2016 Bitfinex hack. It's the largest seizure in US DOJ history and all eyes are on the US to see if funds will be returned to the Bitfinex cryptocurrency exchange. The couple have not been charged with the original hack as the Department of Justice concentrates on the money laundering evidence which is extensive. They are alleged to have used every type of money laundering known to man including, buying physical gold, using non-KYC exchanges, using mixers, but it was buying $500 gift cards that brought them unstuck. Full DOJ deposition here.
2. Spectre of European War looms large
Mass media is full of warnings of imminent war in Ukraine. Putin seems like he is making a case for war and blaming Ukraine for attacking separatist regions of the country while this month recognising the separatist areas as autonomous. The conflict has seen both countries become friendlier with crypto as a way to gain donations (Ukraine) and potentially get around sanctions (Russia). The Dumas plans to ban Bitcoin have been shelved for plans to regulate and allow crypto investment. Facebook has been full of crypto wallets to donate to the Ukrainian cause.
UPDATE:
War has begun, soldiers have landed on Odessa, strategic bombing in Kiev and Kharkov has begun and Ukraine's navy is almost completely destroyed already.
3. Federal Reserve continues on push to withdraw stimulus to fight inflation
The Fed is pushing on with reduction of stimulus. Rate rises are expected as early as next month. The equity market is already suffering (5.2% down in the last 5 days) as a result, and the jury is still out on whether the Federal Reserve will be able to continue their policy or will the markets force a U turn back to stimulus, like we've seen in the past.
4. El Salvador tourism up by 1/3
Since making Bitcoin legal tender the tiny Latin American country of El Salvador has seen tourism boom 30% with GDP growth at 10%. That's all with no fiat currency of their own and a hostile IMF. El Presidente is setting an example for other South American and Central American countries with Mexico reportedly close to introducing a Bitcoin friendly bill to parliament shortly. There is a race for #2 - country to make Bitcoin legal tender. The spoils go to the early adopters.
5. Bulgaria introduces publicly listed crypto funds
ETN's will allow Bulgarian citizens to invest in crypto in a regulated asset class without having to hold private keys themselves. It's another positive step for a country leading the way in Europe. Bulgaria may be one of the largest holders of Bitcoin as a sovereign nation according to some sources.
Education: Custody and Private keys
Crypto is a journey to self sovereignty and it is a mission at Stormrake to help people on this journey.
Today I'll explain what it is to "Custody" your coins and the service Stormrake provides.
Where is bitcoin?
Bitcoin (or other crypto assets) can be thought to exist both everywhere and nowhere. There is no concept of a "location" for bitcoin; bitcoin is just a record on a public, decentralised ledger.
This decentralised ledger is a public database that is distributed globally on thousands of computers.
Who owns a bitcoin?
The concept of 'owning' bitcoin is really just the ability to send/spend the bitcoin, and the network will accept any transaction that complies with the consensus and meets the cryptographic signature requirements.
Therefore to truly own bitcoin, you must be in control of the ability to create a valid cryptographic signature.
Creating a valid cryptographic signature
The ability to transaction and sign on the bitcoin network is based upon mathematics which all starts from a 256 bit random number.
I'll explain the mechanics of this in a little more detail, but a simple way to sign your own transactions is to use a hardware device such as a Ledger Nano
Entropy (Randomness)
It is important that your random generation includes enough entropy that to be truely random. To write it in decimal it would be: 1.15 x 10^77 or 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,665,640,564,039,457,584,007,913,129,639,936.
This is roughly the number of atoms in the universe. Fortunately, the simple way to achieve massive amount of entropy is to roll a dice 100 times. You can also combine entropy from multiple sources so a truly random input alongside compromised inputs will still give you a truly random output.
Generating an address
Each address uses your entropy to create a pair of numbers on an Elliptic Curve. This pair is known as a "public" and "private" key.
Your bitcoin address is derived from the public key, and the private key is used to "spend" those coins.
source: https://medium.com/coinmonks/what-is-a-bitcoin-address-6c822c857004
Managing funds and safely storing your secret
Now that you have carefully generated the entropy, there are a number of ways it can be stored and managed.
1. Mobile or Computer Wallet
These are useful and simple, but can be compromised by malware/viruses. Great for play/spending money, similar to amount of cash in your wallet. Two good wallets to experiment with are Muun and Bluewallet
2. Hardware wallet
A hardware device, dedicated to the purposes of managing private keys, and never directly connected to the internet. We'd recommend Ledger
3. Multi-sig wallets
Multiple secrets can be combined to require multiple signers to create transactions. This can be done using Elliptic Curves or the more beautiful Schnorr signature scheme.
4. Backups and Paper wallets
Your wallet can written down or stamped into steel plates. These methods will store the secret but you'll still need a computer or device to sign the transaction.
It is important to mention if you plan to create your own wallet, your backup method should be safe from accidental loss and safe from theft (or hacking). For example, if you securely generated your private key but then took a photo on your phone then the digital copy on your phone massively undermines the safety of your wallet.
So what does this all mean?
At Stormrake, we've taken a number of steps to safely and carefully manage all aspects of custody so that those looking to invest in bitcoin don't need to worry about this. However as people travel down their crypto journey, and crypto tools improve and become easier to use, we expect (and hope) that people will eventually start to become more "self-sovereign".
There is a lot more to talk about on this topic so please keep sending your feedback and suggestions.
If you're mathematically curious, I strongly recommend looking into Elliptic Curve Cryptography. Some further reading here:
https://en.bitcoin.it/wiki/Elliptic_Curve_Digital_Signature_Algorithm
https://en.bitcoin.it/wiki/Invoice_address
Stock to Flow Valuation:
The stock to flow shows we are still way below trend this month. This is what I would call "oversold territory". This is the biggest deviation from model since its inception in 2017.
Monthly Memes
Ilya Lichtenstein - Allegedly stole 120,000 BTC - You can write your own meme to this one
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| As Russia advances on the remainder of Ukraine we are reminded that the Simpsons predicted this a long long time ago. |
Until next month, Happy Investing!
Stormrake Team
custody@stormrake.com
General Advice Warning
The information provided in this newsletter is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information contained here you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant Product Disclosure Statement (PDS) of the product provider to make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice. You can get a copy of relevant PDSs from Stormrake by email custody@stormrake.com. Disclaimer
All statements made in this newsletter are made in good faith and we believe they are accurate and reliable. Stormrake does not give any warranty as to the accuracy, reliability or completeness of information that is contained here, except insofar as any liability under statute cannot be excluded. Stormrake, its directors, employees and their representatives do not accept any liability for any error or omission in this newsletter or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided in this newsletter is owned by Stormrake. You may not alter or modify this information in any way, including the removal of this copyright notice.Copyright © 2022 Stormrake Pty Ltd, All rights reserved
