Understanding Paper Bitcoin

30.11.22 05:00 AM By Stormrake

The Rake Review: November 2022

Real or Fake?

We all know that the amount of physical Gold in the world is dwarfed by the amount of paper Gold. Paper Gold is derivatives (futures and forwards) but also gold certificates and gold deposit paper. Essentially, someone else holds your gold and you think you own it.

I have no issue with derivatives because for every futures long there is a futures short. For every seller there is a buyer. So, the underlying supply should not change. One man's asset is another's liability. However, holding a paper deposit only works if the Gold is actually there. If the gold isn’t physically there then the paper adds to the supply and artificially suppresses the price.

The same exact principles apply to Bitcoin. We all know that there will never be more than 21 Million actual physical bitcoin (Physical because it provably exists even though its digital). However, is there any paper Bitcoin out there?

The whole FTX saga and subsequent rolling defaults across the industry has proven that there was a huge amount of paper bitcoin. By some accounts - 80,000 bitcoin may never be recovered from FTX alone. That is to say that 80,000 bitcoin may never have even been at FTX. That’s 80,000 bitcoin worth of holdings people bought, thought they were holding but never actually existed. Effectively it was a fake supply of BTC that served to artificially hold the price down.

In total between FTX and all the other bankruptcies this might represent a significant portion of all bitcoin in existence. Just think about it for a second, if all that extra paper bitcoin wasn’t created by the fraudster SBF, what would the price have ended up during the last bull run and more importantly what might the price be in the next cycle?

For a comprehensive report on what happened with FTX, you can read our article covering the entire topic HERE.

The Stock to Flow Valuation Model

The Stock to Flow (StF Model) aims to show the bitcoin price trajectory over time based on historical prices, supply and turnover. We have talked about the Stock to flow model being invalidated over the last year, due to moving far off course, but maybe the problem isn’t with the model. Maybe the problem is with extra supply created through fraud.

Here’s what the model looks like:

You can see the multicoloured line (BTC Price) deviating from the plan. The model was all but invalidated earlier this year. However, with the information that FTX didn’t actually hold the bitcoin that they promised it’s possible there is nothing wrong with the model and the price will resume the expected course to $100k USD.

Where to from here?

The industry will recover, minus a bunch of players that were potentially caught doing the wrong thing and a handful of others that just lent money out and got caught, but that’s business.

Regulators will be circling as they now have the excuse for action. On the other hand it was SBF that wanted tighter regulation. Regulation that was aimed at stopping DeFi and making more people use his platform. Regulators have to be careful what they wish for. Poor regulation could cause more problems than it solves.

Gravity has been reversed and bad news is likely already priced in. Positive news, whether macro or crypto related, could drive prices up. No news is good news in this environment and prices may start creeping up.

In the short term, DeFi tokens that don’t require custody to trade could do really well. Tokens such as UNI, GMX etc have already fared well. It’s important to keep in mind all of crypto’s market cap is under a trillion with Apple being worth more. Crypto prices are now a spring ready to bounce. There is blood in the streets and conviction is required. All power to those that have conviction.

It's important in these chaotic market times to head back to basics. We cover what is important and what to focus on during these bear markets HERE.

Market Update

Here is the fast five of what you need to know about the crypto market in November 2022:

Bitcoin has shed 21.1% of its value over the month due to the FTX collapse, bringing its market cap to just over $300 Billion USD.
Ethereum had a slightly worse performing month compared to BTC, having lost 23.5% of its value. Its market cap of $146 Billion USD is now less than banking giant, Morgan Stanley.
The total crypto market cap received a substantial beatdown as $181 Billion USD was evaporated. This reduction equates to a near 19% drawdown for the month.
The best performing coin for the month was Trust Wallet (TWT). As the FTX collapse forced many to realise the value of self-custody and rushed assets into their own wallets. This caused many wallet tokens to get a serious bid.
The worst performing token for the month was Solana. As the entire SOL ecosystem was heavily backed by SBF and FTX, their collapse caused SOL to get crushed as well.

Video of the month

Crypto podcast Bankless covers the entire timeline for the daisy chain of leverage with granular detail and no holds barred.

Please note that this Video of The Month is nearly two hours in length but provides supreme coverage of the entire bear market and its root causes.

In the news

Arbitrum Transaction Count Rises to 62% of Ethereum Transactions
CoinDesk ran an investigation into Alameda Research and found its balance sheet is mainly FTT token.
In bankrupt Lebanon, locals mine bitcoin and buy groceries with tether, as $1 is now worth 15 cents
FTX files for chapter 11 having entered into bankruptcy proceedings
Crypto lender BlockFi files for bankruptcy citing exposure to FTX
Treasury pledges crypto regulation next year after FTX collapse
Total crypto market cap is now worth less than Amazon
GMX now enters the top 3 of crypto apps generating fees

Education

In our most recent Thunder Trading Update, we covered the complete beginner's guide to crypto self-custody. You can read the full article HERE.

In light of the current circumstances, we want to take as many opportunities as possible to inform our readers to protect themselves and remove counter-party risk. It's critical to learn how to self-custody your own digital assets, even if you wish to use a broker/exchange to buy, sell or swap, you should aim to have the majority of your high value assets in your custody.

Whether you choose to use a Ledger cold storage solution or web wallet such as MetaMask, or even take the best of both worlds and have a Ledger connected to your MetaMask, you end up with full control and transparency of your own assets. Although you do have to take more responsibility and assume full risk for the safe keeping of your own digital assets, it has been shown many times through crypto history, Mt.Gox to FTX and everything in between that leaving your Bitcoin on exchanges is a recipe for disaster.

Worth noting, that by taking custody of your own crypto assets you can start participating on-chain. This opens you up to the world of DeFi, NFTs and potential airdrops. Bear in mind, there are many pitfalls in that space too and much of the tokenomics and activity is quite circular but you learn a lot and develop a unique set of skills.

Lastly, by taking control of your very own Bitcoin and crypto assets, you fully embrace Satoshi's dream of the sovereign individual and you don't need to trust any third party, when you can easily verify your own assets.

Memes of the month

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The information in this newsletter is general only. It should not be taken as constituting professional advice from the author - Stormrake PTY LTD.

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