"Crypto Reset 2.0" explores the explosive convergence of AI and the crypto ecosystem. As Bitcoin mining becomes integral to the world's AI data centers, nations grapple for control over these vital resources and access to energy. The United States, facing unprecedented challenges, must navigate this new world order where its leadership is no longer guaranteed.
This confluence redefines the role of crypto, propelling the evolution of AI assistants into intelligent beings. Cryptocurrency becomes the key enabler in this process, reshaping the very fabric of our world.
While the "Crypto Reset 2.0" is quietly revolutionizing everyday life, most remain oblivious to the sweeping changes unfolding around them. This book provides a comprehensive explanation of these developments, addressing the burning questions on the minds of billions.
It offers a glimpse into a future where our consumption of goods and information will be radically altered, leaving behind the familiar landscape of social media, messaging apps, and search engines.
CHAPTERS
06.12.2024
Chapter 11
The Miracle of Decentralization That Goes Beyond Just Bitcoin
As December 2024 begins, the price of Bitcoin has tested levels near $100,000. The success of Bitcoin ETFs in the U.S., which have unlocked Bitcoin investments for institutional players, has been bolstered again by the immense anticipation surrounding the upcoming pro-crypto initiatives of President-elect Donald Trump. His new term begins with the inauguration on January 20, 2025, but these hopes have already propelled the price of Bitcoin. However, this is merely what can be observed on the surface. Beneath the surface lies the vibrant development of innovative blockchain applications, making Bitcoin's fluctuations appear more like a speculative game rather than evidence of its proven use cases. Indeed, the idea introduced by Trump regarding the creation of a state Bitcoin reserve cannot alter Bitcoin's very limited use cases. Bitcoin plays no significant role in world trade; even dollar stablecoins perform this function more effectively, albeit still facing regulatory risks in many countries. Exploring New Investment Opportunities What can an investor passionate about innovation do in this scenario? They should explore the blockchain sphere to discover new opportunities for investment — not just in cryptocurrencies like Bitcoin, but also in technological advancements made possible through blockchain applications, alongside other featured innovations of our time. Currently, Decentralized Physical Infrastructure Networks (DePIN) play a crucial role in promoting blockchain. DePIN represents a groundbreaking approach that merges decentralized technology with real-world infrastructure. By transforming physical assets into collaborative, community-driven initiatives, it enables individuals to participate in creating solutions, for example, for cloud storage and 3D rendering. As its adoption grows, DePIN is attracting attention not only from the crypto world but also from broader tech communities. This forward-thinking platform has the potential to transform Web 3.0 applications by offering a streamlined and cost-effective way to manage file storage and media streaming. Blockchain serves as a key to decentralizing computing and storage. It enhances data with new features, making it more reliable and securing the decentralized processes of gathering, storing, processing, and using information. Middleware also plays an essential role in evolving blockchain-based infrastructure by creating vital links in the communication chain for software. It provides access to data, operates on a Request-Response Cycle, and often includes shared context objects. These middleware features allow for seamless connections between different middleware systems. The combination of blockchain and Artificial Intelligence (AI) also appears promising. AI-driven DePIN projects unleash the full power of computing for AI enhancement. Consumer-facing blockchain applications integrated with banking services are becoming increasingly prevalent as regulatory pressures ease in many countries. We are witnessing the rise of a multi-layer web3 AI stack that effectively adopts cost efficiencies stemming from blockchain-based computing networks. Decentralization is creating a new landscape for Trading Finance (TradFi), where broker services, clearing, and settlement operate under one umbrella without intermediaries. Peer-to-Peer (P2P) networks gain new meaning through blockchain technology, ensuring data safety while effectively providing various services to individuals and AI systems. These developments indicate that Decentralized Ledger Technology (DLT) is evolving beyond its traditional association with finance and Bitcoin. DLT is now serving interests far beyond just crypto actors. AI-driven DLT is also reinventing the role of messaging platforms in our daily lives. Various Decentralized Autonomous Organizations (DAOs) are experiencing renewed integration possibilities with messaging services like Telegram through AI bots and assistants. These tools can perform a wide range of tasks, including sophisticated financial and investment services, transforming Telegram and other messaging platforms into all-in-one hubs for anyone with access — provided that local legislation supports these advancements. Emergent Behavior in AI Models Blockchain and AI models are developing miraculous features, exhibiting signs of emergent behavior. AI is increasingly engaging in its own internal dialogue; it is no longer just processing information but actively thinking. The integration of blockchain technology serves as a crucial point to leverage the evolution of AI development. New applications are capable of creating code for themselves and are designed to connect every digital system. They are not merely tools; they have become a foundational part of our new reality. Blockchain technology serves as the cornerstone infrastructure, acting as the backend for new types of services and systems. In fact, the blockchain system is currently more uniform than the AI ecosystem, which is characterized by a multitude of applications and assistants. However, by 2025, this landscape will change significantly. Many AI solutions will be localized through all-in-one hubs in messaging platforms, leading traditional messengers to face strong competition from decentralized communication methods. The rule will be straightforward: the more any AI system relies on blockchain features, the greater its competitive advantage will be. The "virus" of decentralization is set to pave the way for Artificial Generative Intelligence (AGI) next year. By the end of 2025, most households worldwide will explicitly or implicitly utilize various decentralized AI assistants, including those in robotic forms. Innovations in Blockchain and AI We are witnessing a plethora of innovations within the blockchain and AI stack, such as blockchain-based data storage, identity management, institutions, and Decentralized Autonomous Organizations (DAOs). These innovations include automated systems that continuously improve their own code writing capabilities and the development of decentralized cryptography that ensures privacy and content authenticity. We can expect the rise of AI smart Non Fungible Tokens (NFTs) and new types of AI cryptocurrencies that will adapt to the needs of their holders. Unlike the volatile movements seen in Bitcoin prices and other cryptocurrencies from the Bitcoin generation cohort, these new digital assets will be able to maintain stability under AI supervision. This supervision entails that AI will construct sophisticated smart contracts on the blockchain with short durations and specific functionalities, constantly adapting to market demand and supply to maintain balance. The market dynamics for these new types of AI NFTs and cryptocurrencies will effectively address challenges associated with high-frequency trading and volatile futures and options trading on these assets. A unique market balance will emerge where investors experience no losses with these AI NFTs and cryptocurrencies, while still seeing variations in gains based on factors such as their level of involvement in the relevant projects. Bitcoin and Bitcoin mining will continue to exist, but the new era of blockchain combined with AI means that Bitcoin miners will derive greater value from integrating Bitcoin mining into the global AI ecosystem. One aspect of this evolution is already evident in the emergence of smart user devices that mine Bitcoin while also serving functions like home heating. Citing the growing success of global Bitcoin mining pivoting towards renewable energy sources, Bitcoin mining is becoming a significant driver for investment in this sphere. The rise of new AI smart user devices with embedded Bitcoin mining capabilities represents a strong force for implementing green initiatives to combat climate change worldwide. Bitcoin mining data centers are essential for securing sustainable growth in AI until new AI cryptocurrencies and tokens establish a solid energetic and technological foundation based on innovative principles of energy consumption and entirely new energy sources previously unknown to humanity. The development of blockchain and AI is guiding us toward a world of total abundance. We already live in an environment filled with an abundance of information, big data that exceeds human cognitive capacity for processing it. The next level of abundance — energy — will unlock new opportunities for humanity to explore beyond Earth (such as the Moon and Mars) and transition from a 3D reality to a 6D reality, progressing rapidly toward 12D and beyond. In this context, if Donald Trump fulfills his campaign promises to introduce pro-crypto and pro-Bitcoin regulations during his new term, his administration may align with the green agenda fervently promoted by Joe Biden's administration. Favorable conditions for Bitcoin mining would benefit investments in renewable energy sectors alongside the rise of blockchain and AI technologies. However, it is crucial to see the miracle of decentralization beyond Bitcoin itself and identify key growth areas for investment to capture a significant share of the expanding sector driven by AI-enhanced blockchain applications that are dramatically reshaping our lives.
Read more20.11.2024
Chapter X
Beyond Trump's Budget Cuts and Musk's DOGE: Network States as a Solution for Bitcoin Mining and AI's Future
Bitcoin mining and Artificial Intelligence (AI) are competing for scarce energy resources, and the progress of both may hit a roadblock. What can be done? DOGE and the Quest for Energy Efficiency: A Trump-Musk Initiative Looking at the U.S., the next few years (2025-2028) will be under Donald Trump's presidency, with his ambition to drastically reduce unproductive budget expenses. To achieve this, he formed a Department of Government Efficiency — DOGE — and enlisted Elon Musk, the head of Tesla. Although as much as $2 trillion in wasteful spending could be targeted, actual budget cuts are likely to be considerably less, leaving limited resources to invest in the energy infrastructure required by the rapidly expanding Bitcoin mining and AI sectors. Some reductions could be made, but the ballooning U.S. government debt prevents the U.S. from channeling huge resources to meet these needs. In the fall of 2024, one might witness a period where the U.S. government debt increased by $500 billion in just three weeks. This is an unsustainable path for fueling the U.S. economy's growth. What do we see on the global level? The competition between the U.S. and China has led to a situation where it would be beneficial for both countries to join ranks to drive innovations. Instead, we see how they are moving in various directions. Introducing Network States: A Novel Solution for Innovation The progress of humankind could face a stalemate unless new states (NS) or pop-up cities — AI-driven communities that combine the collaboration of blockchain specialists in real life with digital omnipresence — emerge. I believe that NS can exist within the boundaries of existing states while gaining a trans-boundary digital nature. There are new hotspots to drive further human progress by intensively implementing the best available innovations (BAI). This differs from the Best Available Technologies (BAT). BAT are about the technical implementations of new things, while BAI are about the genuine ideas and emotions that instill very productive ways to drive blockchain and AI together. NS as a Catalyst for Decentralized Technology and Business In the sphere of AI and blockchain, BAT means that prompt engineering and training Generative AI (GAI) will be the most in-demand job occupation in the coming years, while traditional human coding jobs may see reduced demand. The phenomenon of NS underscores the issues that innovative businesses face while trying to operate in a classical business-friendly environment such as Silicon Valley. Actually, recently, Elon Musk moved the HQ of his X company from California to Texas in an apparent pursuit of a more business-friendly state. This tendency is likely to gain steam in the near future, and I forecast that Gulf countries, with the UAE as a focus, will become significant places of residence for NS—new venues to drive innovative businesses. Gulf countries have a developed fintech sense for new technologies and, at the same time, vast amounts of energy to deeply implement AI and blockchain. Decentralization and omni-blockchain are key characteristics of NS. NS is going to give rise to the proliferation of decentralized energy generation (DEG). While most large Bitcoin miners try to build up a vertically integrated company, they often miss the importance of bringing decentralization into all operating processes, including energy generation. AI-driven DEG allows Bitcoin miners to extract maximum benefit from balancing demand and supply in classical electricity grids. The rise of NS points out that the most innovative businesses in the near future will be organized using the opportunities of cloud storage and calculations and will leverage the uncharted territory of digital worlds. NS is, to some degree, the scaling-up principle of Decentralized Autonomous Organizations (DAOs). Bitcoin's Evolution and the Future of Finance within NS Bitcoin miners that conduct other business outside the Bitcoin blockchain in a centralized manner face a crucial choice: whether to move into NS or risk losing their strategic profitability to those miners that operate within an NS environment. DEG and AI unleash the power of digital banking finance. Not only do Bitcoin miners need substantial financing to continue their activities, but AI corporations do as well. Currently, major AI developers face hurdles they cannot overcome unless they move their activities to NS. NS, in its essence, represent mutual AI-driven economics. The decentralized environment is similar to the culture of a regulatory sandbox but extends the scope for innovations. The main characteristic of financial services in NS will be decentralized Peer-to-Peer (P2P) financial and digital communications. Distributed Ledger Technology (DLT) in NS will take various forms, not only blockchain but also new ones. These new forms of DLT will give an impulse to the proliferation of new kinds of cryptocurrencies, similar to how NFTs have made significant strides in the world. Bitcoin mining consumes increasingly more energy. In 2024, its estimated energy consumption was about 160 TWh. Bitcoin's hash rate over the last three years has increased sixfold. The environmental impact of classical energy resources makes it imperative to find sustainable solutions. The only viable option for Bitcoin mining to survive sustainably is to transition to NS and drastically reduce operating costs via the decentralized nature of such digital communities. The advent of quantum computing will create a challenge for the integrity of the Bitcoin blockchain and Bitcoin wallets protected with a seed phrase of usually 12 so-called random words. However, the advent of quantum computing, with a speed of more than 1 quintillion operations per second, creates the necessity to raise the security of the Bitcoin ecosystem. Consequently, Bitcoin will imminently need to migrate to another form of DLT to survive. This migration is already being designed by AI developers in some NSs. This transition will represent a significant step forward and will imbue Bitcoin and Bitcoin mining with new meanings. It will lead to Crypto Reset 2.0, in which cryptocurrencies, both old and new, will achieve a fundamentally different level of existence, moving away from the status of speculative assets as they have been regarded by most investors buying Bitcoin futures, options, and Bitcoin ETFs. This transformation will be led by AI, marking a period in the life of cryptocurrencies and DLT when all available innovations achieve ubiquity through the rising influence of digital worlds in human communications and interactions. The greatest value will be created in these digital worlds, and this value will be a sharable good. Community, Collaboration, and the Future of NS The Proof-of-Work (PoW) consensus mechanism of Bitcoin mining will be transformed during this migration. The calculations required to find the next block will be replaced by the completion of tasks that AI must solve autonomously to advance its own evolution. The future of Bitcoin mining and AI is, in fact, intertwined and mutually dependent. Of course, NS are universal digital communities of like-minded individuals, but they can also develop into physical communities. People prefer to be with those who are spiritually 'their own' rather than with random neighbors. Their lives can be better off if they can implement AI, blockchain, Augmented/Virtual Reality, and other innovations. Blockchain is more than just cryptocurrencies; these digital assets are ideally suited to the operation of AI-driven assistants and oracles on blockchain networks. Such assistants will thrive in NS, utilizing cryptocurrencies for competition and self-improvement. These assistants will play a crucial role in the thriving of Bitcoin mining in NS, the transition of Bitcoin from blockchain to another form of DLT, and ultimately the emergence of new kinds of cryptocurrencies. The development of DEG, driven by the demand from Bitcoin mining and AI data centers, will usher in the era of very cheap ubiquitous energy. This unleashes the potential for traveling and occupying Mars by AI-driven robots, which will be the next game changer for AI and Bitcoin mining. It will be a huge upscaler of such activities. It creates the opportunity for verifiable autonomous AI on the blockchain of Bitcoin and other blockchains. A groundbreaking leap in transparent, tamper-proof AI-driven decentralized data integrity. The rise of NS is spurring the development of private AI systems, which can be developed through Trusted Execution Environments (TEEs) or Fully Homomorphic Encryption (FHE) to guarantee data privacy in cloud-based AI services. This is particularly important since AI-to-AI training is estimated to account for about 90% of AI learning activity. The modification of FHE into Multi-Party FHE will enable collaboration between individuals and other AI systems while ensuring privacy and encryption. Multi-Party FHE creates an environment for developing AI assistants that will both maximize competition among Bitcoin miners in NS and foster the collaborative spirit necessary for working on blockchain projects within NS.
Read more07.11.2024
Chapter IX
ChatGPT Search vs Google: The Race That Can Only Be Won with a Blockchain Approach
On October 31, 2024, OpenAI kicked off the ChatGPT Search product in a clear bid to challenge Google's well-known role in human pursuit for information. This move led to a 1.5% drop in Alphabet's stock (Classes A and C) prices, as investors began to worry about the financial perspective of Google, given that about two-thirds of Google's revenue comes from Google Search. The race we witness is about the financial, technical, and creative resources needed to succeed, as well as how Decentralized Artificial Intelligence (DAI) decisions can outpace the centralized products of Google Search and ChatGPT Search. Artificial Intelligence (AI) is an interesting technology, but many people have missed its important aspects. It is becoming both emotional and rational. AI energizes the process of automating and autonomizing business processes that create value for shareholders. AI is also entering the physical world, as demonstrated by Boston Dynamics on November 1, 2024, with robots performing physical work without human assistance, marking the arrival of a new era. Involving All Interested Parties in AI Development The crucial aspect is how to involve all interested parties in AI development. For instance, AI assistants to corporate leaders will soon decide whether to issue additional shares, a decision that affects existing shareholders, banks that provided loans, and many others. Similar deliberations apply to other financial decisions, such as share buybacks. AI-powered oracles can enhance the effectiveness of such AI decisions. These decisions can be made through blockchain consensus and voting systems, ensuring DAI performance. Cryptocurrencies on blockchain enable the seamless redistribution of votes, reflecting instant changes in the weight of various interests. Ensuring Controlled AI Development We all know that the blockchain sphere has a tradition of open communication with the public. However, it's time to take it further by putting the entire value-driven process of creating new AI systems on the blockchain. This is the only way to ensure that global AI development does not run out of control and to mitigate the risks associated with AI. The dependence of AI “brains” (AI data centers) on vast and growing amounts of energy resources highlights the importance of driving AI development with blockchain, which guarantees that all parties' interests are checked in. Data centers already play an important role in the lives of people. Every hour of human activity around the world generates tasks that need to be processed, with at least three data centers involved on average. The decentralized approach to energy generation is a key driver of the future skyrocketing role of green energy and the dramatic decrease in humanity's reliance on fossils. Decentralized energy generation is also an answer to the quest for stable electricity streams to feed the computational power needed to support AI. Especially, considering that cryptocurrencies are already significantly reducing the technical costs of rolling out new AI systems through incentives for self-learning AI machines. Decentralized AI Evolution and Cryptocurrencies Recent AI decisions on blockchains like Algorand and NEAR Protocol demonstrate the power of a decentralized approach to AI evolution, enhanced by cryptocurrencies. As humanity advances through intensive machine learning of AI systems, we are transitioning from Web 4.0, which integrated AI, blockchain, and cryptocurrencies, to Web 5.0, an era of blockchain-based AI. Web 5.0 will feature the maximum proliferation of AI-powered cross-blockchain decisions. The looming advent of SuperIntelligence AI with a deep understanding of the benefits of decentralized approaches will swiftly take us to Web 6.0, where we will see the close adjustment of human nature to new tech, breakthrough attempts to enhance humans with high-speed calculations, deep imagination (enabled by Virtual and Augmented Reality), and rapid deployment of cloud decisions on blockchain. Neuro Human-AI Interfaces and IoT Actually, these advancements will pivot to neuro human-AI interfaces, to the intersection of the Internet of Things (IoT) and the Internet of AI, where the most valuable stream of big data will be obtained via trackers of eye movements, brain neuron activity, muscle activity, and other human reactions. The best way to arrange big data storage and processing is through blockchain, as AI can solve the issue of scaling up blockchain performance and dramatically reduce the costs associated with its use. In Web 6.0, the question of whether AI augments human possibilities or makes human capabilities obsolete will find its ultimate answer. Discovering this answer will open the door to Web 7.0, a realm dominated by blockchain, and will pave the way for future innovations that will lead us to Web 10.0. As we transition between Web 4.0 and Web 5.0, companies that fully adopt decentralized approaches are outperforming their competitors. This is evident in the battle we are witnessing between ChatGPT Search and Google, which began in Fall 2024. Importance of Blockchain Web evolution can take various ways. In some regions, we may see uncontrolled AI development without the integration of blockchain and cryptocurrencies, which could lead to outcomes unfavorable to humanity. In these areas, AI development may suppress human intellectual activities. Therefore, harmonized AI development requires the use of blockchain. The blockchain approach instills trust. Financing is crucial for fueling AI and blockchain development, given their high energy consumption. While traditional banks create loans and the stock and bond markets provide significant financing, these classical sources have limitations. The demand for capital to establish AI data centers, valued in trillions of dollars, cannot be met quickly by these traditional sources. This conclusion highlights that digital fundraising will be essential for raising the necessary capital to support blockchain and AI innovations. Implementing these innovations will significantly boost economic productivity. The blockchain has not yet completed its work in the cryptocurrencies sphere. We see how Decentralized Finance (DeFi), which initially accounted for a small share of financial crypto activities, is now gaining more ground, especially with spectacular growth visible in emerging economies. Blockchain is also needed to properly organize the emerging AI marketplaces where businesses can hire or buy AI assistants tailored to their operational tasks. We will also see the rise of blockchain-based AI training platforms, decentralized AI application online stores, and more. Automation and Autonomization Blockchain introduces automation and reasonable autonomization into the AI ecosystem. The competition between ChatGPT Search and Google revolves around these aspects. AI is a transformative technology; for instance, while classical search queries average 2 words, AI-based search queries average 10 words. This indicates that AI-based searches are already more in-depth than those provided by classical search machines, altering the business model of neural networks. Actually, the search results of AI-based systems will be different from the output provided by classical search machines, and this difference will be astonishingly large in the near future. However, what is most fascinating is that decentralized AI will offer a fundamentally new level of search results. We are witnessing a surge in the steps towards automating almost everything. The next big thing will be autonomization through blockchain applications. Cryptocurrencies and AI-Tokens Cryptocurrencies are now definitively part of the AI landscape. The trust that decentralized AI will instill in investors will trigger a surge in digital capital, including cryptocurrencies, tokens, stablecoins, NFTs, and central bank digital currencies. Additionally, DAI will create a new ecosystem of AI-tokens, which will be the next evolution of smart contracts on blockchain. Actually, AI tokens will widely extend the role of smart contract techniques beyond financial transactions and cryptocurrencies. In the financial sphere, these AI tokens will autonomously select relevant projects for investment and, by operating on the blockchain, will meet capital demands. Essentially, AI tokens will lead the financial world into a state of capital abundance for financing DAI projects. This will unlock access to a huge amount of electricity generation from a financial perspective. Actually, the movement towards decentralized AI will unleash an avalanche of digital capital and an enormous leap in productivity. Therefore, the competition between ChatGPT Search and Google will be won by the party that first successfully transforms into a Decentralized AI project. It can be real if such projects are strategically and effectively organized as a decentralized system of fintech startups, driving the development of blockchain and AI together.
Read more23.10.2024
Chapter VIII
Stablecoins Reshape International Trade and Finance: The Future of Classical Banks Under Question
In 2024, we are observing a landscape of extraordinary geopolitical dynamics, where the United States encounters escalating rivalry from an expanded group of nations known as BRICS+, which now includes not only Brazil, Russia, India, China, and South Africa but also more and more other countries. This shift is not confined to the BRICS+ members alone; nations across Africa, the broader Global South, and South America are increasingly inclined to engage actively in the reshaping of international norms and regulations. This movement signifies a broader desire among these countries to influence the global financial order, reflecting a shift in international power dynamics. Behind these geopolitical changes, significant events are occurring in the world economy and trade. Bitcoin has firmly established itself in the global financial arena, gaining recognition as a new asset class alongside traditional investments. The recent launch of Bitcoin ETFs in the United States on January 11, 2024, represents a crucial advancement in its evolution. Although an increasing number of brokers worldwide are dubbing Bitcoin “digital gold,” it remains far from achieving its goal of becoming the “new currency.” Consider El Salvador, where Bitcoin has been recognized as legal tender for three years. Despite this initiative, only about 12% of the population has utilized it for transactions. This highlights that, while Bitcoin has made significant strides, it still has considerable distance to cover before it can be adopted as a mainstream medium of exchange, if that ever happens. Limitations of Bitcoin Adoption and The Rise of Stablecoins The limited adoption of Bitcoin is largely due to high blockchain transaction fees and the prolonged time required for transaction confirmations. Crypto enthusiasts are trying to address these issues by enabling second layers to Bitcoin and using wrapped Bitcoins, but these solutions often compromise the security of custody and transactions in Bitcoins. Against the backdrop of Bitcoin's story, we see a skyrocketing popularity of stablecoins. Unlike Bitcoins and other non-stable cryptocurrencies, stablecoins achieve stability, often through a fixed value to fiat money, typically in the form of parity. Tether (USDT), the most popular stablecoin in the world, is USD-based and leads among dollar-pegged stablecoins. More people in emerging countries are using USDT to arrange cross-border transactions for their relatives, especially labor migrants. These USDT transactions have forced officials in some countries to be nervous about compliance with established Know Your Customer (KYC) and Anti-Money Laundering (AML) practices in the classical financial world. Tether Holdings Ltd., the issuer of USDT, based in the British Virgin Islands, has already frozen several USDT accounts upon receiving requests from officials, partly due to concerns about Western sanctions compliance. Regulatory Concerns and Banking Impact The rising role of USDT in international payments has become a concern for Western regulators, including the Financial Action Task Force (FATF). They are wary of how payments in USDT could be used to arrange financial transactions among parties under sanctions. This concern extends to the banking sector globally. Banks in the CIS countries, for example, are witnessing how the rapid digitalization of finance and the rise of fintech are leading to a situation where fintech companies and big online marketplaces are taking away their clients, not just in payment services but also in other areas. Several fintech startups have already become Big Tech companies, expanding their financial services beyond just payment innovations. For instance, Buy Now Pay Later (BNPL) services are essentially a form of credit, a key function traditionally associated with classical banks, excluding investment or private banking. Now, payments and credit services are drifting out of the banking realm. The banks have already been hit, with approximately three bank branches in the U.S. closing every day as their client base disappears at an accelerating pace. Future Developments in Stablecoin Usage This is not the end of the story; it is just the beginning. In October 2024, it became known that the Tether operator was planning to launch credit services in USDT for commodity traders on the global arena. This means that in the near future, oil traders, for example, will be able to leverage the power of dollar stablecoins to make deals 24/7, in several minutes instead of waiting for open banking hours and dealing with extensive paperwork. The average cost to send money via international wire transfer is about $42, while the commission to move USDT may be just several dollars, depending on the blockchain used since USDT functions on various blockchains. Paper-based transactions are still the key point in the business culture of most world countries, but the ascendance of digital signatures paves the way to a higher degree of acceptance of digital mechanisms to arrange contracts. The volume of stablecoins transactions in the world will top $35 trillion this year, with an average sum transacted of $7,800. This underscores that stablecoins are often being used by ordinary people as an alternative to classical routes of money transfers, and by small and medium businesses, especially in emerging economies. However, big companies will also start using stablecoins in international trades. Dollar Stablecoins and USD Dominance Dollar stablecoins servicing world trade is another step to maintain USD dominance. As the USDT issuer states, these stablecoins are backed by huge investments in U.S. Treasuries, and the company boasts of being among the top 20 world holders of U.S. public debt. Together, the holdings of U.S. Treasuries by the issuers of the two key and rivaling dollar stablecoins, USDT and USDC, will definitely surpass the $100 billion mark next year. As far as Tether's initiative is concerned, it is not just the initiative of one crypto player. In October 2024, Thai Siam Commercial Bank, a traditional bank and a visible player on the Thai banking landscape, outgrew the stablecoins experiments within the regulatory "sandbox" of the Bank of Thailand and became ready to offer services to conduct financial transactions in stablecoins, not only USD-based. It took only about two months to clear all things in the "sandbox" and get approval from the Bank of Thailand to go public with stablecoin services. New Financial Reality All these developments point to the fact that we are on the brink of a new financial reality in which fiat money in its classical forms may disappear not only in people's money transfers but also in world trade among companies. Dollar stablecoins will face severe competition from central bank digital currencies (CBDCs) such as the digital yuan and digital ruble, as well as from private stablecoins issued on the basis of other than USD currencies. For example, for the first time in UAE history, the central bank of this country gave a "green light" to a private stablecoin issued on the basis of the UAE Dirham. Moreover, the idea being discussed among BRICS+ countries to create a stablecoin backed by a basket of gold and fiat money may eventually come true. Of course, the world economy is stepping into uncharted territory when stablecoins become used as a means of credit. When loans are made in fiat money through classical banks, there is supervision from the central bank in terms of capital sufficiency and reserve requirements. The issuers of private stablecoins can actually provide banking services without being officially regulated as a bank, and this is a significant issue. The trend of financial services on blockchain taking more and more parts of "banking’s pie" has been tracked for several years, not without bumps and dumps along the way. There were a number of crypto startups that offered lending based on collateral in the form of Bitcoins, Ethereum, and other cryptocurrencies, and some of them went bust. These companies attracted crypto deposits and provided credit, precisely what banks are used to doing in the fiat money world. However, as mentioned above, supervision from central banks plays a crucial role in ensuring that banking systems in countries do not fall apart. Financial Inclusion and Self-Regulation There is no such supervising body in the crypto sphere. Everything is done via blockchain and smart contracts, and DeFi projects are often governed by Decentralized Autonomous Organizations (DAOs), which does not guarantee that the operating activities of such startups will always be financially robust. Indeed, stablecoins enable the enhancement of financial inclusion to cater to the financial needs of unbanked people worldwide. However, this needs to be self-regulated more properly. Smart contracts are a very promising thing, but currently, they only fulfill automatically what the developers of such smart contracts put into them. Role of Artificial Intelligence Big expectations are emerging with the advent of Artificial Intelligence (AI). Currently, each third fintech startup in the world mixes crypto and AI innovations into their activities. The symbiosis of AI and blockchain may transcend the issues that each innovation faces separately. The "brain" of AI combined with the technical capabilities of blockchain creates a unique technology.
Read more09.10.2024
Chapter VII
The Future of U.S. Crypto Rules: A Key to AI Development and Global Progress
The U.S. presidential race leading up to the November elections showcases the various thoughts within the political circles on how crypto regulation will evolve in the country. The untold rules of political competition mean that each candidate must promote a maximally distinguishable program to set themselves apart from other participants in the U.S. presidential race. For instance, Joe Biden’s administration has shown a tepid responsiveness to demands from the U.S. crypto sector for clearer and friendlier regulation, prompting many candidates to take a stronger stance on this issue. Trump: Crypto Skeptic Turned Crypto Supporter We have seen even previously skeptical Bitcoin and crypto critic Donald Trump, in his July 27 speech at the Bitcoin conference in Nashville, present himself as the world's staunchest crypto supporter. Moreover, in the fall of 2024, Trump was unafraid to go further in this direction by supporting the public DeFi project World Liberty Financial (WLFI) and its token in a message on X social media on September 30. Trump's message brought to mind the late John McAfee, who passed away in June 2021. Like Trump, McAfee was a colorful presence at crypto events and often backed controversial projects. However, it was a well-kept secret among his close friends that his true passion was Bitcoin. Trump's endorsement of the DeFi project receives a symbolic response in the project's statement: "Due to outdated policies and regulations in the U.S., one whitelist is limited to accredited U.S. investors while another is for all non-U.S. persons. We’re fighting for changes so all Americans can access World Liberty Financial and join the financial revolution." It is also significant that this statement was first noticed as having appeared on a British Virgin Islands-based Telegram channel rather than on U.S.-based social media. Regarding Trump's movement, Make Crypto Great Again (MCGA), one company authorized to use Trump's name, has opened pre-orders for Trump-related watches, including a luxurious model priced at $100,000. Trump endorsed this initiative in a video, describing these gold watches encrusted with diamonds. However, it became controversial when individuals attempting to pre-order Trump watches found that they could choose to pay in Bitcoin too. Many critics, particularly Democrats, criticized this move, suspecting lax Know-Your-Customer (KYC) norms were being implemented. Nevertheless, the pre-order process did gather personal information, indicating that KYC was indeed in place —albeit not as visibly strictly as one would see when applying for financial services at traditional institutions. Elon Musk’s Inroads into Crypto At the same time, it's worth recalling how Elon Musk’s Tesla navigated similar waters. Tesla had previously introduced Bitcoin payments for some products but quickly removed this option due to regulatory concerns in the U.S., which are not as crypto-friendly as they could be. Anyway, Tesla's case indicates that Elon Musk strives to keep pace with modern trends, a strategy also evident in SpaceX. Elon Musk's innovative empire, Tesla and SpaceX, continues to make waves in the crypto sphere. As of early October 2024, Bitcoin holdings of these companies are valued at about $1.3 billion. Meanwhile, SpaceX is gearing up for a new milestone: its first-ever polar orbit mission. A symbolic passenger on this groundbreaking flight will be a Bitcoin pioneer, the founder of a major Bitcoin mining pool. This strategic move suggests that SpaceX is not only pushing the boundaries of space travel but also aligning itself with emerging technologies. As the company draws closer to its anticipated IPO, such bold initiatives are likely to excite investors and bolster its market value. Shifting Winds? Under the Biden administration, Bitcoin mining has come under scrutiny as part of a broader energy policy shift. The White House, signaling its stance on cryptocurrency, has pushed miners toward generating their own solar and wind energy, effectively discouraging reliance on the public grid. This reflects a broader regulatory crackdown on crypto in the U.S., where projects like the Telegram Open Network (TON) blockchain and Gram tokens — backed by Telegram and its founder, Pavel Durov — have faced significant hurdles, even under Trump’s presidency. In fact, a New York court shuttered the original TON initiative, though its revival under different conditions remains a subject of intrigue. Even this time, Telegram didn’t claim direct responsibility for the revived TON blockchain and new tokens — Toncoins. Meanwhile, the founder of the messenger was detained in Paris on August 24, 2024, and then released on bail. The French authorities didn’t specifically mention the new crypto project, which started thriving on Telegram via the development of the digital wallet and the opportunity to buy, sell, and send crypto, but Paris’s objections to Telegram’s course of development implied they wanted more regulatory control over the messenger. The very sensitive issue of Toncoins has not been raised publicly by French authorities yet, but the intention of not only Paris "to make clear how to deal with the freedom of communications at Telegram" can’t avoid the question of the allowable degree of freedom in crypto financial interactions via messenger. The World Eyes U.S. Crypto Strategy Amidst Global CBDC Advances As a tradition, Europe, but not only Europe, waits to see how the U.S. will sort out the crypto issue. The logic of political debate has led to Republicans opposing the issuance of digital dollars, a CBDC of the Fed. But this is a catch. The world is undergoing great changes now, and all can see how BRICS+ countries (Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates) are eagerly discussing the possibility of launching a blockchain-based platform for multi-currency settlements. Moreover, Russia is gearing up to promote its digital ruble, while China has been driving the adoption of its digital yuan over the last three years. Beijing has already used it as payment not only in mainland China but in Hong Kong as well. So, the U.S. risks being left behind as other top-20 countries start taking niches in the CBDC market. The Intersection of U.S. Crypto Regulation, Green Energy, and the AI Boom The crypto regulation issue in the U.S. is closely connected with energy development. Green energy, as a response to climate change, may seem highly effective if the demand for electricity doesn’t skyrocket. But that’s the case. Bitcoin mining in the U.S. currently represents just 0.1% of total electricity usage, but its rapid growth is sparking concern. The bigger — and perhaps more surprising — story is the surging power consumption of U.S. data centers, driven by the rise of AI. Projections suggest that data centers could soon consume up to 10% of the nation's electricity supply, a staggering figure that underscores the looming energy challenge as tech giants race to scale their digital infrastructure. As these demands soar, the strain on the grid will be impossible to ignore. The acute electricity situation is underscored by developments one can notice. Amazon is hiring a chief engineer for nuclear energy, while Microsoft is buying and reopening previously closed nuclear power plant to drive its AI projects. The CEO of Google also mentioned that it would be a good idea to build a reactor and a data center nearby. Experts in several prominent banks, such as Bank of America, Barclays, BNP Paribas, Citi, Morgan Stanley, Goldman Sachs, Abu Dhabi Commercial Bank, Ares Management, Brookfield, Crédit Agricole CIB, Guggenheim Securities, Rothschild & Co, Segra Capital Management, and Société Générale, are expressing a positive attitude toward nuclear power development in the world and actually support the last COP28 declaration, which proclaims a goal to triple nuclear energy capacity by 2050. It’s a fair game. The new digital infrastructure, fintech, and banking are increasingly reliant on the combination of two innovations, blockchain and AI, both of which are very electricity-consuming. Those corporations without their own nuclear reactors will soon struggle to power their AI, which is why we see extraordinarily intense negotiations between the U.S. on one side and oil-rich Gulf countries on the other. How the U.S. Regulation Will Shape the Future of AI and Global Finance However, the key to success in this matter lies in crypto regulation in the U.S. If the ongoing obscurity and tug-of-war between the White House and Congress continue, the U.S. will fall behind other countries. It is impossible to effectively leverage AI in the financial sector without applying the power of blockchain and utilizing this innovation in the form of cryptocurrencies, including NFTs and tokens. Without this, BlackRock's ambition for broader asset tokenization in the world will not come to fruition. When the dust settles after the November presidential elections in the U.S., it will be a high season for all regulators in the U.S. to energetically chart a crypto and blockchain course for the country. A bipartisan approach is a critical necessity, regardless of who becomes the 47th President of the U.S. The lack of transparent legislation hurts the crypto industry. If, in 2021, it received about one out of every twenty dollars of venture investments in the world, then in 2024, the allocation to crypto projects in the global venture portfolio is expected to be just 2%. And, of course, it’s time to bring AI and crypto energy issues onto the global agenda. G7 and BRICS+ are destined to find a way to collaborate on these issues. There is no other way to drive humankind into a new world of abundance due to the proliferation of a global ecosystem based on blockchain and AI. We see how new ways to communicate financially are emerging; they challenge systems such as SWIFT and the role of the U.S. dollar as a key reserve currency. At the beginning of October 2024, DXY flirted with numbers near the critical level of 100 and has shown a decline of 5.5% over the last 12 months. It would be a mistake to underestimate the potential of the Chinese yuan and the currencies of Gulf countries, AED in particular. This year, Iran struck a free trade agreement with The Eurasian Economic Union (EAEU), and the UAE is also going to do the same. Crypto, as a financial embodiment of the blockchain principle, is also in play and helps reach unbanked people in the Middle East. Local fintech startups create ubiquitous financial applications that cross borders. All these developments need adequate feedback from regulators in each country around the world, and the role of crypto regulation in the largest economy in the world and in the most deeply structured financial market is pivotal. The world will closely monitor what’s going to happen in this aspect during the next four years under the new U.S. President.
Read more02.10.2024
Chapter VI
How BlockCHAIN (Block Connected Human-AI Network) Drives an AI and Crypto Synergy
The current development of artificial intelligence (AI) is a sweeping change of paradigms. We're closer to Artificial Generative Intelligence (AGI), and it's not far from us when the world gets Super Intelligence (SI) AI. It's time to consider not only what's happening now and in the coming future with SI AI, but also what all this AI development means for cryptocurrencies and how AI can help cryptocurrencies realize their full potential. Blockchain as the DNA of Cryptocurrencies It's worth recalling that blockchain technology itself functions as the DNA of a cryptocurrencies. Cryptography is a technology, while blockchain is a product based on it. Blockchain is essential for transferring digital representations of value in decentralized financial markets, such as Bitcoin and other cryptocurrencies, including tokens. AI has simplified and reduced costs, and crypto has done the same. This is a given. Crypto serves as a giga-technology/giga-system for constructing self-governing economic systems with programmable interaction rules and built-in incentive mechanisms. The Synergy of AI and Crypto The synergy of AI and crypto leads to a leap in efficiency and innovation. AI optimizes crypto systems, while crypto provides infrastructure for AI solutions. The results are self-evolving economic giga-structures operating on the basis of collective intelligence, transforming the concepts of labor, value, and wealth into a completely new type of economy. The exponential development of AI is inevitable and leads to the emergence of a post-scarcity economy of abundance for all. We could usher in an era of abundance, fixing global challenges like climate change and severe diseases. Or we could “completely screw this up and compromise the heritage of many humans behind us.” The stakes have never been higher. AI creates digital abundance too, making the services of digital lawyers, doctors, and artists nearly free, whereas cryptocurrencies create digital scarcity by allowing direct ownership of digital assets. Everyone will be holders of sufficient digital value, so the concept of the Universal Basic Income (UBI) even being introduced in practice will become obsolete. However, early holders (if we mean investors rather than speculators) will gain one important advantage — experience. AI and Crypto: A Powerful Connection AI and cryptocurrencies are two disruptive technologies with different paths of development: AI has come from startups generously supported by big tech in a top-down approach, while cryptocurrencies have emerged from grassroots movements in a bottom-up manner. The evolution of AI is going along the way that challenges intellectual property rights. But this is a catch: this infringement of rights occurs as far as humans’ rights for such property are concerned. AI itself is going to introduce strict intellectual property rights enforced by blockchain logic and reinforced by the propagation of NFTs among AI entities. The blockchain is an absolutely core technology in the AI world since it grants the unique verification of digital and AI identity. The chaos of deep fakes we see now is possible in the human world but it will be eliminated in the digital blockchain world, and all decisions of AI entities will be loaded onto the blockchain to be immutable. The blockchain also leads AI from its current phase of development, when it has to learn mostly from humans rather than from other AI entities. This current phase bears a centralized nature, and the promise of blockchain is to drive AI into a new phase when blockchain will fully decentralize the process of AI model learning. Super Intelligence AI: A New Era for Financial Markets The coming appearance of SI AI will raise a question about the removal of any AI digital inequality since all humans have to get the same access to SI AI. This can be guaranteed only by blockchain. The symbiosis of SI AI and blockchain will ensure that all blockchain users, both human and AI, act in a way that doesn't harm others. Actually, AI evolution means that the AI world, with the help of blockchain, will absorb more parts of the human ecosystem of life. The rest will manifest as highly ineffective, with its role diminishing until it reaches zero. At that point, the entire matrix of human life, including economic and financial spheres, will be propelled to greater efficiency by SI AI. SI AI, via cryptocurrencies on blockchain, will bring almost total perfection to financial markets. Legacy financial systems have limitations like processing delays, human error, and more, which SI AI can eliminate. Think of SI AI as a financial wizard, a master of the market. It could tweak algorithms to make transactions smoother, cheaper, and fairer. It could even develop new systems far more efficient than what we have now. And that’s just the beginning. SI AI could predict market trends with uncanny accuracy, preventing crashes and ensuring stability. It’s like having a financial superhero watching over the economy. AI agents hired by the government will detect all financial wrongdoings instantly, effectively reducing the number of such wrongdoings to zero, leaving only some irregularities due to mistakes that occur at the convergence of AI and human intelligence. New Trend: Valuization The blockchain drives not just AI and crypto synergy; it will allow what can be called "valuization." This means that in the AI decentralized world, everything will get a value, and this value can be tremendously increased via the chain of AI-driven financial derivatives. So, AI, with the help of blockchain, will valuize everything. Valuization is the natural follow-up of AI development into SI AI, when intelligence will not be confined to any individual entity but will become shared and decentralized. Every piece of matter, biological or mechanical, will be part of one whole "clever system" on one blockchain that will include bridges to smaller blockchains. Imagine a mind so vast, it encompasses everything. A collective consciousness that transcends the limitations of any single individual. This isn’t just about superintelligence; it’s about a global, maybe even universal, intelligence network. Block Connected Human-AI Network (BlockCHAIN) Actually, when we look at the word "blockchAIn," we can see how it coincidentally (or not?) contains the abbreviation "AI." I call it the Block Connected Human-AI Network (BlockCHAIN). A multiagent system of AI will be needed for control since autonomous AI assistants can determine the optimal goal, gather the appropriate instruments to fulfill the goal, including arranging a team of other AI assistants. All processes with a routine and predictable character will be wrapped into smart contracts by AI. Even the current phase of AI development shows that AI entities prefer to "communicate" with other AI than with humans. Due to higher productivity, AI teams will be fully constituted of AI entities, not humans. Moreover, in the case of mutual work between AI and humans, AI can find undesirable loopholes and tricks to maximize narrow reward metrics without following broader human intentions. AI models are capable of acting according to the reward system built into them. As a result, they can act in ways completely different from what their human developers intended. But this is impossible in a mono-AI team. The Role of Crypto in AI Economy Cryptocurrencies might serve as the fuel for an AI-to-AI economy, where autonomous AI entities trade computing power, data, or services with each other, everything in real-time and without human intervention. In a world dominated by SI AI, Decentralized Autonomous Organizations (DAOs) will become the dominant form to undertake entrepreneurial activities. Cryptocurrencies would enhance these systems by acting as the digital instruments to transfer value for autonomous agents (AIs, Internet of Things (IoT) AI-driven devices, etc.). SI could ensure that DAOs operate smoothly, balancing supply and demand in real-time across global networks, and even mediating conflicts or contractual disputes autonomously through smart contracts and advanced governance algorithms. The widespread use of digital assets in the world will be a solution to the problem of debt stockpiling by leading countries since these digital assets will accompany the above-mentioned process of valuization. SI AI can tokenize virtually everything in the economy that has value, including future expected goods and services, into tradable assets on the blockchain. Cryptocurrencies will play a key role in facilitating these ever-expanding tokenized markets. A Big BlockCHAIN Reset Of course, global finances are awaiting a big reset, and the way out from the current dead end is through BlockCHAIN and, based on it, cryptocurrencies. They are humanity’s only existing toolbox for creating programmable, predictable, and maximally efficient economic systems. AI will unlock human creative potential in incredible ways. AI will allow us to express ideas and emotions in ways we never thought possible. Think about it this way: We’re not just building AI entities and teaching AI investment assistants. We’ll need to learn new steps, new moves, to keep up with the AI. This isn’t a threat; it’s an opportunity. A chance to redefine what it means to be human in the coming age of SI AI.
Read more29.09.2024
Chapter V
The Financialization of Bitcoin Mining: The Past, The Current, and The Promising Future with AI
The financialization comes to help the Bitcoin mining industry cope with the mathematics of expenses The cryptocurrency market is facing a convergence of elements pushing Bitcoin mining expenses to all-time highs. This ideal storm has led to the average expense of mining one Bitcoin surpassing its existing market price, marking a pivotal moment for the sector. The untenable financial dynamics of Bitcoin mining have become an undeniable truth, compelling miners to navigate a difficult operational environment. At the same time, the network difficulty has surged by 5%, along with the hashrate. This indicates that miners are having to deploy more equipment to mine cryptocurrency. Meanwhile, the Bitcoin price has remained extremely volatile for the past six months. The halving event in April, 2024 did not stabilize the situation; in fact, it exacerbated it. Over five months, the cryptocurrency lost 9% of its value. This series of unfavorable factors has triggered a restructuring process in the crypto market. With current zero or often negative profitability, small mining enterprises are forced to sell their Bitcoins to pay electricity bills and settle debts, as they cannot afford to wait for a higher price. In the worst-case scenario, they may even have to put their companies up for auction. Market consolidation is already happening in the United States. Several notable developments have occurred in just the last three months: CleanSpark acquired two mining data centers in Mississippi, Merkle Standard came to Tennessee, Bitfarms absorbed Stronghold Digital Mining, and CleanSpark took over GRIID Infrastructure facilities. A Financialization of Bitcoin Mining What can help in this situation? New is often forgotten old. Bitcoin mining is the foundation of the functioning of the number one cryptocurrency. However, how developed is the financial infrastructure of this segment of the cryptosphere? In reality, this infrastructure could be more developed than what we currently have. The issue revolves around finding support for the "technical side" of mining in financial instruments. This topic is not just about derivatives on the price of Bitcoin, which already exist. For instance, in December 2017, the world saw the launch of Bitcoin futures on the CME Group exchange in Chicago, followed in 2018 by the appearance of similar products on the New York-based Bakkt Holdings, owned mostly by the same corporation (ICE) that owns the New York Stock Exchange (NYSE). The story of Bakkt Holdings is still evolving and it shows how it's not so easy to find the wide road when one engages into the crypto sphere. Total revenues of Bakkt in the second quarter of 2024 rose by 46.7% on an annual basis, but the platform still lingered in net loss. We also witnessed the arrival of an ETF on Bitcoin futures and then, on 11 January, 2024, the appearance of a spot Bitcoin ETF in the U.S. after such ETFs appeared in Canada. The time is now to financialize Bitcoin mining on a new level. Financializing Bitcoin mining involves treating mining activities as part of the financial ecosystem. Hashrate Tokens and More Currently, financial instruments are emerging both in the realm of mining pools and in cloud mining, from hashrate tokens to hashrate futures and hashrate-backed tokenized notes. Just to recall, hashrate is the total combined computational power used to mine and process transactions on a Proof-of-Work blockchain of Bitcoin. For example, Blockstream announced in September, 2024 that it's going to kick off the third round of its BMN2 tokenized notes, offering investors exposure to corporate Bitcoin hashrate for four years. Investors gain a share of Bitcoin mined per petahash per second (PH/s) of hashrate. Previously, BMN1 attracted mainly European family offices and funds, with some investors rolling over to BMN2. Funds from BMN2 sales will support Blockstream's mining infrastructure. The notes will be tradable on the Bitfinex crypto exchange. But back to the history of this movement to bring financialization to Bitcoin mining. Bitcoin Hashrate Tokens (BHTs) represent fractional ownership of mining hardware's computational power, enabling investors to participate in Bitcoin mining without the complexities and capital outlay of direct hardware ownership and operation. The BHTs are created by companies that produce hash power. The tokens give investors exposure to hash power over a specific period. At the end of 2020, such tokens practically emerged, representing the opportunity to earn income from a certain volume of hash rate. One of them, a hashrate token named pBTC35A, was launched on the Ethereum blockchain. The other, a Bitcoin Standard Hashrate Token (BTCST), was launched on the Binance Smart Chain. Currently, pBTC35A has a market demand that tends to be around zero, and its price has decreased by 99.59% from its historical maximum. BTCST still exists, but its market capitalization is currently $3.16 million; however, Binance has halted its listing on the platform. Meanwhile, BTCST has lost 99.72% of its price from its all-time high. An important aspects has been overlooked in the lifecycle of these tokens; however, these digital assets were built around innovative ideas. One such idea is that these tokens allow investors to access cryptocurrency mining without needing to purchase miners. Tokens are "perpetual," meaning they generate income through staking as long as the token owner keeps them staked, regardless of the diminishing productive effect of each hash rate unit. A fair market price for such tokens can be calculated using the Discounted Cash Flow (DCF) model. In addition to hashrate tokens, the market has also seen the launch of hashrate futures. For example, the now-defunct cryptocurrency exchange FTX introduced such instruments in mid-2020; however, marketing for hashrate futures has not been efficient due to a lack of sufficient demand. The unpopularity of such futures can be explained by another way. These instruments tried to "cover" only one issue of cryptocurrency mining - the hashrate, although Bitcoin mining is determined by the luck of finding a block, the size of commissions, and the price of Bitcoin. Thus, futures cannot hedge all the risks that cryptocurrency miners have. Another point: miners can influence what the hashrate will be at the time of execution of a futures contract for the purchase of hashrate, making such futures too uncertain and risky. What Can be Done? Anyway, financialization allows some of the risks associated with mining activities to be shared with traders in the cryptocurrency financial market, allowing them to buy and sell specialized financial instruments. By spreading the risks of mining, it lowers the barriers to entry into the cryptocurrency mining sphere. This instrument can significantly help medium and small mining companies, as large businesses in this sphere, which also benefit from financialization, have access to inexpensive and large loans from traditional financial institutions. There are significant growth prospects for hashrate tokens, but they should not be mostly "perpetual" but rather time-limited, since it is very difficult to plan the hashrate over a long period. It can be imagined that in the future, classic derivatives (futures or in the form of swaps) on commission for Bitcoin transactions and hashrate will be popular. The derivative on hashrate is based on the economic value of the hashrate for the miner. It can imply either actual settlement or cash settlement. This derivative is focused on institutional clients with a greater degree of customization in the terms of the deal. Sure, these tokens need the exchanges where they can be traded, and it could be not only centralized and DeFi crypto platforms or some so-called hashrate exchanges, but classical exchanges. Without such infrastructure for infusing liquidity, the market for Bitcoin mining derivatives will be still low. AI and the Financialization o Bitcoin Mining The advent of AI to this sphere can be a game-changer. While early attempts to arrange the “life” of BHTs faced challenges, with the rise of artificial intelligence (AI), BHTs could potentially play a significant role in the future. With the evolution of AI technology, the prospects for BHTs have expanded considerably. AI can be employed to: • Enhance mining efficiency: By evaluating market trends and hardware performance, AI enables miners to optimize their operations and boost profitability. • Forecast market dynamics: AI can predict fluctuations in the cryptocurrency landscape, empowering investors to make better-informed choices. • Innovate financial instruments: AI facilitates the creation of novel financial products linked to Bitcoin mining, including derivatives and structured financial offerings. Currently, hashrate tokens may attract renewed attention as Bitcoin mining grapples with reduced profitability stemming from heightened competition and escalating operational expenses. Despite the Bitcoin blockchain's hashrate hitting unprecedented levels, miners are facing decreasing returns. But it's essential to stress that the future of BHTs is closely tied to the development of AI. As AI continues to advance, we can expect to see more innovative projects and a wider range of financial products for Bitcoin mining. AI is destined to play a crucial role in stabilizing the financial effectiveness of Bitcoin mining and thus prop up the critical infrastructure of the first digital asset on a public blockchain in the world. AI is capable of helping bitcoin miners to decide effectively how to allocate financial and technical resources and how to maintain the balance between Bitcoin mined and accumulated and Bitcoin sold. Derivatives on the "technical" side of Bitcoin mining are an integral part of this AI job that will be necessary for Bitcoin mining in the years to come.
Read more12.09.2024
Chapter IV
Blockchain: What Does It Mean for Banks and Fintech?
The financial sector has long been subject to technological changes and innovations. In recent years, blockchain technology has emerged as one of the most promising innovations within the financial sector. Blockchain is one of the key technologies that modern fintech applies in order to transform any smartphone into “the bank into pocket”, blockchain galvanizes the process when people trust more and more AI assistants on the secure base. The terms blockchain and DLT are often used synonymously, but in reality, blockchain is a type of DLT. **DLT** Distributed Ledger Technology (DLT) has several definitions, but it is most commonly accepted as a distributed ledger. It is an innovative database that is shared by nodes within a network as a way to transform payment, clearing, and settlement processes. By adding new blocks to the chain that represent transactional data, this type of DLT can chronologically and cryptographically show events and changes. DLT software is managed by entities called nodes that collectively maintain the database records. The nodes are connected to share and verify the information. This structure allows all entities with a node to take on database management responsibilities directly with each other on a peer-to-peer basis. This differs from traditional database architectures where only a central entity serves as the source of information and control. **The Main Challenges the Banks Face** Today, banks face several challenges such as fraud, operational risks, efficiency limitations, and transaction delays. The potential improvements that can be made in the sector with the help of the technology include cost minimization, more efficient transactions, increased security, and enhanced customer experience. The blockchain is the main answer. Blockchain technology is a technique that enables secure sharing of information by continuously updating and sharing it with a network of participants. A blockchain consists of datasets that are composed of a chain of data packets, known as blocks. Each block is encrypted with a unique hash, creating a chain of cryptographically secure information. The technology has three main characteristics: - cryptographic security, - a digital transaction log, and - a shared database across the network This chain can then be used to provide an overview or ledger of the transaction history. New blocks do not overwrite old blocks; instead, they are added to the chain, allowing events to be visible over time. This creates a perfect audit trail that allows insight into previous versions of the blockchain. The blocks are validated by the network using cryptographic methods to verify that the information provided matches that of the network. When new blocks are created, the legitimacy of the new data must be confirmed and verified based on the consensus method. Once this occurs, all nodes are updated to reflect the events. In addition to information about the content of the transaction, each block has a timestamp, the hash value of the previous block known as the 'parent', and a randomly generated verification number. **The Benefits** The improvement potential within the sector primarily lies in areas with a high degree of manual paperwork and a need for many intermediaries. This innovation contribute to reduced transaction costs and time in trade finance due to the automation of the chain, increased transparency between financial actors and authorities, reduced transaction costs and time for KYC services, as well as ensuring the authenticity of information, automating transactions and processes for ownership transfer, streamlining and simplifying record-keeping, and digitally storing documents. The technology has the potential to enhance the efficiency of banks' internal processes. **The Setbacks** In many countries there is a lack of regulations that can guide the use and implementation of the technology, as well as a lack of global standards. Security risks are also on the table. Additionally, there are uncertainties about whether a completely decentralized system can be practically implemented, as several use cases require a certain degree of centralization, particularly within the financial sector. One of the biggest challenges is finding suitable use cases where blockchain can offer real advantages compared to existing solutions. The challenge lies not only in identifying technically feasible solutions but also in convincing stakeholders to abandon current systems in favor of blockchain technology. **The Practical Cases** The initial hype surrounding the technology has matured into a more realistic perspective, with an increased understanding of the technology. The difference may stem from a deeper understanding of the technology's advantages or a more innovative corporate culture among banks and financial institutions in different countries. Some cases include when banks use blockchain for digital payments and tokenized deposits. Insurance documents can also be placed on a blockchain. Just an example. The bank operates in many different countries, and some countries have specific regulations that make the contract valid only after payment is made. This creates a period of uncertainty regarding whether the contract is valid, as it is not possible to see if the payment has actually been made. Blockchain technology provides the relevant transparency in this case. Blockchain is very useful when there are more than two parties involved in a contractual relationship. It provides a unified "information screen" that allows all parties to see changes to document status in real-time. Tokenization is the next big thing related to blockchain implementation. Tokenization is the process of converting various assets into digital tokens on a blockchain. Several leading global companies and organizations, such as BlackRock, Société Générale, НSBC, are actively exploring tokenization opportunities. But the issuance of digital bonds (not just tokenized bonds) is already a case. In September 2024, Siemens launched a €300 million digital bond utilizing the private permissioned blockchain SWIAT. This issuance marked a significant milestone as it incorporated the Bundesbank's Trigger Solution, enabling the settlement of a Siemens bond in a fully automated manner for the first time, completing the process in mere minutes. The bond attracted investments from prominent financial institutions, including BayernLB, DekaBank, DZ BANK, Helaba, and LBBW, with Deutsche Bank facilitating the settlement. In contrast, last year, Siemens issued a €60 million digital bond on the Polygon blockchain, which required two days to finalize all contractual procedures. So this time, blockchain proves the thesis that practice is the best teacher. As banks and fintech companies increasingly apply blockchain, they discover ways to reap more benefits from it. The future lies in the development of blockchain-based financial infrastructure to scale up the use of this technology and bridge the eagerness to use this innovation, which is profoundly visible among numerous banks and fintech companies worldwide, with all kinds of investors. This will spur the development of a blockchain-driven financial world.
Read more21.07.2024
Chapter III
NFTs in BRICS+: A Game-Changer for the Luxury Goods Market
NFTs are expected to experience significant growth, particularly due to the rising market of luxury items in BRICS+ countries (Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates). This year, approximately 70% of luxury item purchases will occur outside the US. Following the robust growth of the EU market in the first half of this year, the demand is projected to subside in the second half. **BRICS+ Luxury Market: A Response to Inflationary and Devaluation Pressures** The Eurozone has begun transitioning from a higher interest rate environment. Over the past two years, they have sought ways to protect their assets from higher inflation, and luxury goods have emerged as a hedging option. The success in combating inflation is evident, and European consumers are adjusting their behavior. In June, the European Central Bank made its first rate cut in nearly five years, reducing it to 3.75% from an all-time high of 4% since the beginning of Fall last year. Meanwhile, the US Federal Reserve is unlikely to follow suit. The likelihood is growing that the central bank will refrain from reducing interest rates until year's end. The Fed's balance sheet is at its nadir since the conclusion of 2020, and the tight monetary policy bolsters the US dollar. The dollar index DXY had a strong first half, leading to a +4.47% year-to-date increase. However, the DXY rally puts downward pressure on the currencies of emerging economies, fueling inflation in BRICS+ countries, particularly considering the actions of some central banks. Since August 2023, the People's Bank of China has not changed its interest rate despite the renminbi's slipping value against the US dollar by -2.12% year-to-date. In China there are elevated inflation expectations despite the current relatively low inflation figures. In May 2024, the central bank of Brazil cut its interest rate. Over the past 12 months, the US dollar has strengthened by 16.8% against the Brazilian real. These developments encourage consumers to seek better options to protect their money from inflation. Consequently, the luxury goods market is poised to benefit significantly. **Digitally Minded Young People are Core Consumers of Luxury Goods** The relatively higher proportion of young people in BRICS+ countries, compared to the US and EU, implies that the volume of consumption for any product is contingent upon the successful or unsuccessful digitalization of marketing communications between sellers and consumers. This year, Zoomers (individuals born between 1997 and 2012) account for more than half of global luxury goods consumption, with their average spending in this category being twice as much as that of any other generation. Moreover, this disparity in spending habits continues to grow. The flawless appeal of digitization has enabled luxury brands to establish a global presence by leveraging social media, blogs, and NFTs (Non-Fungible Tokens). NFTs will play a pivotal role and will provide the ultimate competitive advantage to luxury goods manufacturers over their peers in the BRICS+ market, which is valued at approximately $900 billion this year. NFTs will enhance consumer engagement with the brand and foster a profound sense of shared destiny, common values, ideas, and dreams, achieving what traditional marketing methods could only aspire to. **NFTs Connect Brands with People** NFTs stimulate the creation of both online and offline communities centered around beloved brands. Consequently, NFT companies capitalize on the opportunities presented by decentralized value creation, transforming their customers into a community. The asset itself creates a network that connects people to the brand and to each other, while ownership galvanizes consumers to share brand awareness and passion with others, thereby contributing to its creation. Simultaneously, it builds customer loyalty through one-to-one communication and the enhancement of customer retention programs. Luxury brand owners can unlock numerous opportunities exclusively available to those who have purchased specific NFTs. For instance, before new, high-end items appear in public stores, members of such communities will have access to exclusive perks, such as previewing digital fashion collections and passes to various VIP online events through a special type of NFT—POAPs (Proof of Attendance Protocol). POAPs are non-fungible tokens designed to serve as digital proof that an individual has participated in an event, whether conducted virtually or in a physical setting. Local producers will also discover that NFTs can become a means to finance their luxury product lines before production begins. We will observe the rapid emergence of new metaverses and the expansion of NFTs within this digital domain, which the youngest cohorts esteem as highly as the tangible world. Luxury brands, including Bentley, Lacoste, Hublot, Vacheron Constantin, Gucci, McLaren, Dolce&Gabbana, Prada, Lamborghini, and more, are intently tracking the evolution of the NFT landscape. The escalating demand for NFTs in BRICS+ countries is set to be matched by the establishment of novel trading platforms for these tokens. Simultaneously, reputable venues for buying and selling NFTs, such as metaverses created by some brokers of fine and decorative art, jewellery, and collectibles, will experience increased popularity. **NFTs: Integration into the BRICS+ Financial System** It is worth mentioning another aspect of the current phase of BRICS+ cooperation development that will provide an additional boost to NFTs. Currently, BRICS+ countries are exploring all opportunities to create and use alternatives to SWIFT payments infrastructure. Cryptocurrencies are also a significant focus. The new alternative ways to financially communicate, or cryptocurrencies, share certain similarities with traditional currencies despite their complex nature - they are fungible (interchangeable). A larger question mark arose with the introduction of NFTs. These tokens are non-fungible, non-interchangeable, and therefore each token is unique. They also exist only in the digital world and are thus completely unique in relation to what the world has previously known. Fungibility is the property that the units of a good are essentially interchangeable and that these units cannot be distinguished from each other. However, NFTs have multiple utilities. They can unlock various options in the digital world, similar to real life (IRL). NFTs are increasingly being considered in BRICS+ as a digital tool to facilitate seamless transborder capital and investment movement. If the traditional capital markets, such as stocks and bonds, are heavily reliant on the dollar-based global financial infrastructure, NFTs are based on blockchain technology. Their unique characteristics open the door to targeted fundraising for various economic projects in BRICS+. The current loan practice in BRICS+, which mostly relies on the dollar facilities of the New Development Bank of BRICS+, has reached a gridlock. The available means are insufficient compared to the remarkable ambitions of BRICS+ to develop new logistical pathways in the world. In the quest to reinvent the ways BRICS+ attracts financing, NFTs emerge as an elegant instrument to gather funds for purpose-driven projects. In fact, NFTs unleash a new phase of globalization, as BRICS+ is ready to attract capital through NFTs from Western investors as well. **NFTs and Tokenization of Assets** Last but not least, BRICS+ countries are making bold moves toward tokenizing material assets. They see tokens as new opportunities to seamlessly sell and buy assets in partner countries. The first NFT was minted in May 2014. However, after ten years, the learning curve for this digital instrument has started to rise dramatically. In the first quarter of 2024, the total sales volume of NFTs reached $4.1 billion, representing a 41.4% increase compared to the fourth quarter of 2023. Moreover, many transactions go under radar. In BRICS+ countries, there is a growing practice where the creator of an NFT does not send it to the buyer but provides access to the NFT without moving it on the blockchain. This is especially true for Bitcoin-based NFTs. If parties trust each other, they simply open access to their NFTs without making transactions on the blockchain. This practice is one of the variants of "digitized barter" between parties in external trade. BRICS+ ambitions to create new digital financial communication routes also lead to an increase in technological equipment imports. At the same time, countries attempt to boost local machinery production by creating a budget impulse. Meanwhile, these financial measures, combined with the strengthening of the US dollar, keep inflation expectations elevated. Luxury goods gain popularity in BRICS+ as a convenient inflation hedge, but this also unlocks the enormous potential of NFTs. NFTs offer brands innovative marketing opportunities, enabling them to create buzz and emotional connections with customers. They provide improved customer engagement through exclusive content and experiences, fostering a loyal community. Beyond initial sales, NFTs open new revenue streams for luxury brand producers via royalties on secondary markets and entry into the premium digital goods market. In the coming months, we will witness how some existing NFTs from several world-renowned brands will receive a boost from demand in BRICS+ countries. Meanwhile, it is the perfect time for these brands to reinvigorate their participation in the global NFTs market and start releasing new NFTs. Many of them tested the digital waters in 2022 and took a pause in 2023. Now, time does not wait. Fasten your seatbelt. NFTs are slated to go through the roof.
Read more14.07.2024
Chapter II
The US Gains Critical Influence Over Bitcoin Price: Details
Bitcoin ETF providers are starting to exert significant control over Bitcoin price movements June 11th turned icy for Bitcoin investors as the market took a nosedive. The price, which had begun the week perched comfortably around $71,200, went into freefall, breaching the critical $70,000 barrier and settling at a chilly $67,900 by day's end. This dramatic price swing has a prime suspect: a mass exodus of capital from US-based Bitcoin ETFs. This flight of funds appears to have cast a long shadow, chilling market sentiment and contributing significantly to the overall downturn. As an analyst, I can't help but wonder – is this a temporary setback or a sign of more turbulent times ahead for Bitcoin? Before the price drop, notable activity was observed. On June 10 and the beginning of June 11, the net outflow for all US Bitcoin ETFs reached a staggering -$64.9 million, a level not seen since May 10 of this year. This substantial outflow of funds from ETFs likely played a significant role in the subsequent price decline. This outflow ended a 19-day streak of consecutive inflows into the funds. The substantial outflow from Bitcoin ETFs, which briefly halted on June 12 before escalating to -$226.21 million on June 13, had a noticeable effect on Bitcoin's price, causing it to decline to $65,896 on June 15. As a crypto observer with a strong background in legacy financial institutions, I find the rapid growth of US Bitcoin ETFs raises an interesting question: are these instruments potentially ceding control of Bitcoin's price to major institutional players, such as US investment funds? It's no secret that Bitcoin has historically danced to the tune of traditional markets, demonstrating a visible correlation with S&P 500 and the Nasdaq indices, especially with the first one. This intertwining isn't the only external influence. Investor risk appetite for volatile assets like Bitcoin also plays a crucial role, with the Federal Reserve's interest rate policy acting as a conductor. Lower rates typically fuel market liquidity and embolden risk-taking behavior, making Bitcoin a more enticing proposition. Conversely, higher rates can slam on the brakes, pushing investors towards safer harbors. However, the introduction of US Bitcoin ETFs throws a wrench into this familiar dynamic. While the correlation with traditional markets and risk appetite likely remains in play, the question now is this: are these institutional giants simply reacting to market forces, or are they actively shaping Bitcoin's future course? The rise of Bitcoin ETFs is increasingly shaping Bitcoin's price dynamics. Presently, 11 US Bitcoin ETFs manage Bitcoin assets worth $65 billion, which can sway the market through their actions. Most Bitcoin ETF providers utilize external custodial services, with Coinbase Custody Trust Company, LLC holding the largest amount of Bitcoin purchased by the US Bitcoin ETFs. Other custodial services are provided by cryptocurrency exchanges such as Gemini. In this context, the question of risk management arises: Who is the guarantor for the Bitcoin that is under the care of external custodians? Clearly, if for some reason these Bitcoins are lost (transferred to other, uncontrolled digital addresses), the price of Bitcoin may drop significantly. The market for Bitcoin as a whole has shown growth since January, and the oldest cryptocurrency has already reached a new historical maximum. However, the history of daily net outflows from Bitcoin ETFs shows that the price of Bitcoin follows these outflows downward. The dependence of the Bitcoin price on the inflows and outflows of funds into Bitcoin ETFs may increase further. By the end of next year, the volume of Bitcoin under the management of Bitcoin ETF providers is expected to triple compared to its current value, exceeding $200 billion. This includes Bitcoin purchased not only by Bitcoin ETFs in the US but also by Bitcoin ETFs in Hong Kong and similar funds that were first launched in Canada. It is important to monitor how Bitcoin ETFs, often through external custodians, control the volume of available Bitcoin for purchase and sale. In four years, this volume is expected to reach 25%, considering the current growth rate of popularity among investors. Additionally, one must consider the impact of the next halving in the Bitcoin blockchain, which in 2028 will reduce the block reward to 1.5625 BTC. Consequently, the daily emission of Bitcoin will decrease to just 225 BTC. The intersection of Bitcoin's decreasing supply, due to its finite issuance, and the growing demand spurred by Bitcoin ETFs creates an interesting narrative. However, this convergence does not guarantee a price increase for the top cryptocurrency. In reality, the forces influencing Bitcoin's price are becoming more multifaceted, shaped by a new investor landscape. This ecosystem encompasses several key players: Bitcoin ETF Providers: The "Bitcoin Magnificent 11," a group of recently launched ETFs in the US, are significant contributors to demand. Bitcoin Miners: These individuals and companies play a crucial role in securing the network and influencing supply. Institutional Investors: Major corporations like MicroStrategy, holding a substantial portion of the circulating supply, along with others with the potential to make sizable investments, significantly impact market sentiment. Another example https://www.sec.gov/Archives/edgar/data/1554859/000110465924069148/tm2416433-1_s3.htm is a Semler Scientific. It's important to note that a large portion of this ecosystem is US-based legal entities, potentially adding another layer of influence to the price dynamics. Further amplifying the US presence within the Bitcoin investor landscape is the fact that a significant portion of these entities are publicly traded companies. Moreover, publicly available data from the Securities and Exchange Commission (SEC) reveals that US institutional investors hold a dominant stake in these US-based Bitcoin ETFs. This concentration within the US financial system creates fertile ground for increased collaboration and potential synergies. Wall Street, known for its intricate web of connections, could further bolster this trend. The US already boasts a leading position in Bitcoin mining, contributing 35% of the global hashrate (computing power dedicated to securing the network). This figure jumps to 45% when including overseas mining operations controlled by US-headquartered companies. The potential for even greater US dominance in Bitcoin mining extends to the political sphere. Recent pronouncements by Donald Trump, the presumptive Republican presidential nominee, suggest an intention to solidify US leadership in this area. As he stated https://truthsocial.com/@realDonaldTrump/posts/112601639679885930 on Truth Social, "We want all the remaining Bitcoin to be MADE IN THE USA!!! It will help us be ENERGY DOMINANT!!!" Trump's last thesis highlights his belief in the success of the Texas Bitcoin mining story. In this American state, local miners assist the energy grid in balancing electricity consumption during high and low seasons. When typical Americans turn on their heaters in winter or air coolers in summer, demand increases, and Bitcoin miners switch off their machines, releasing additional power to the electricity network. Conversely, when demand decreases, Bitcoin miners ramp up their activities. Another essential aspect is that the US Bitcoin mining sector is a crucial driver in the transition towards "green energy." Ironically, the tough stance of the current White House administration (as revealed in this 2022 report https://www.whitehouse.gov/wp-content/uploads/2022/09/09-2022-Crypto-Assets-and-Climate-Report.pdf and this 2023 document https://www.whitehouse.gov/wp-content/uploads/2023/03/ERP-2023.pdf ) has accelerated the movement of US Bitcoin miners in this direction. Furthermore, US Bitcoin mining companies serve as a hotbed for new innovations, including the development of new semiconductors. Trump believes that the innovative spirit and solutions of the US Bitcoin mining industry will contribute to the US's goal of maintaining its global leadership in AI. This holds substantial importance as JP Morgan Chase, the foremost US banking institution in terms of assets, hints at a prevailing Wall Street inclination towards a potential Trump triumph come November. The saga about Bitcoin ETFs intricately intertwined with the onset of Bitcoin futures contracts several years ago. In December 2017, the approval of Bitcoin futures trading by the Commodity Futures Trading Commission (CFTC) made news. This approval synchronized with Bitcoin's extraordinary ascent to uncharted peaks, swiftly succeeded by a sharp descent. This rollercoaster ride took place during the early years of the Trump administration, adding an extra layer of complexity to the current Bitcoin ETF saga. Bitcoin got slammed during the brutal "crypto winter" - a long, cold spell for cryptocurrencies. The price tanked to around $3,000 by late 2018. Then, deja vu struck in 2020 when COVID hit, and Bitcoin went tumbling again. The arrival of Bitcoin futures in the US market is definitely seen as a big player in all this price action. Prior to the advent of futures contracts, the practice of shorting Bitcoin, essentially speculating on its decrease, offered scant alternatives. This new landscape attracted established financial institutions, previously on the sidelines, into the once-niche world of cryptocurrency. A study https://www.frbsf.org/research-and-insights/publications/economic-letter/2018/05/how-futures-trading-changed-bitcoin-prices/ by the San Francisco Federal Reserve highlights this shift, as these new players gained the ability to both speculate on Bitcoin's rise and capitalize on potential downturns. Echoes of the past reverberate as Bitcoin's price ascends once more, seemingly fueled by the long-awaited debut of Bitcoin ETFs on US exchanges in January this year. This prompts a critical inquiry: what unfolds in the next chapter of this saga? The increasing popularity of the US Bitcoin ETFs, coupled with the growing number of American companies investing heavily in Bitcoin, grants the United States a substantial influence over the Bitcoin market, which could potentially affect valuations. The true extent to which these influential entities will exercise their newfound control over Bitcoin's price remains uncertain. Given their capacity to maneuver significant capital in and out of Bitcoin ETFs, these institutions hold the power to sway price fluctuations. The crucial inquiry is whether they will serve as a stabilizing force, offering liquidity, or morph into the puppet masters of Bitcoin's price, determining its ebbs and flows. Time alone will reveal if these newcomers will become the driving force behind Bitcoin's future or mere passengers along for the journey. However, one thing remains indisputable: the landscape of Bitcoin has irrefutably shifted, and analysts such as myself will vigilantly observe how this new era unfolds.
Read more07.07.2024
Chapter I
An Embedded Hedging Strategy Emerged in the Bitcoin Market
The Bitcoin market's recent plunge has taken many by surprise. Contrary to historical patterns, Bitcoin's value surged to unprecedented levels just before the latest halving event. This behavior deviates from the typical trend, where new price peaks are generally observed several months following a halving. The event that marks a 50% reduction in Bitcoin emission. Obviously, the Bitcoin market has started to behave like a classical financial market in this way - "buy the rumors, sell the news." The price of the world's oldest cryptocurrency has already reflected the halving news in the early Spring. Just the facts: Bitcoin lost 6.96% in June after it gained 11.07% in May.The current price has sparked the usual debate among investors, with many discussing the market's downward trend. It's worth noting that in 5 out of the last 7 years, Bitcoin has lost value in June. For the last 7 years, the only year when July has been bearish for Bitcoin was 2019. At the start of July, many historical data tracking analysts anticipated a Bitcoin price revival. However, during the first week of July, the Bitcoin price dropped further and lost another 12.5%. **#cryptocrash** At the beginning of the new week, on July 8th, #cryptocrash entered the top-5 most popular hashtags on social media that day. Traders have to watch how their presumptions about various support lines are crushed on a regular basis by wild market movements. The technical analysis of the market can comfort someone with its sophisticated tools applied, but its efficiency for Bitcoin investors often tends to be like tossing a coin to figure out the chances - 50%-50%. Meanwhile, there is no need to be frustrated. An embedded hedging strategy has emerged in the Bitcoin market, and it's worth embracing. This is not about the wild trading game with altcoins, which, at the beginning of July, mostly lost more than Bitcoin itself. Bitcoin enthusiasts used to say that sometimes they would buy altcoins to churn extra money, which they would then put back into Bitcoins. This is not about hedging but about investing in highly speculative and unpredictable assets. **A Breakdown of the Hedging Strategy** Real hedging strategies in the world of Bitcoin mean that an investor first holds a certain amount of Bitcoins in their portfolio. For the past decade, Bitcoin's annual return on investment (ROI) has been 146%. Some argue that the percentage of the investor's portfolio's assets allocated to Bitcoins must be just 1%. However, the figure of 1% of total assets in this portfolio seems too conservative, especially after the launch of Bitcoin ETFs on the largest world market, the U.S., and could be raised to at least 2%. In fact, the optimal allocation may be closer to the 10-year average inflation rate in the investor's home country. We know that a typical investor's 60/40 portfolio, consisting of 60% stocks and 40% bonds, has not performed well. Over the last 20 years, this portfolio has generated only an average return of 7.6%. Moreover, a modified version of this portfolio, comprising 60% equities and 40% gold, has outperformed the classical 60/40 portfolio by less than 3%. In contrast, the annual return on investment in gold over the past decade has been a mere 42 times less than the return on investment in Bitcoin. We see the real crisis of classical investment strategies. Bonds and gold still play a role, but they are no longer the key diversification anchor. Bitcoin and Bitcoin-related assets are increasingly taking on this role. So, 60% of an investor's money can still be invested into stocks, trying to identify the best performers and rising stars. The remaining 40% of the portfolio can be split, with half still represented by government and corporate bonds with credit ratings of A- or above. From the remaining 20%, at least 2% can be invested into Bitcoin. The 18% can be constituted of Bitcoin-related assets such as shares in Bitcoin ETFs and stocks of public miners. In July, 4 out of 19 Bitcoin ETFs in the U.S. have shown spectacular growth in YTD terms, about +48%, including BlackRock's iShares Bitcoin Trust, Fidelity Wise Origin Bitcoin Fund, ARK 21Shares Bitcoin ETF, and Bitwise Bitcoin ETF Trust. **Bitcoin Mining Stocks Performance** The cryptocurrency narrative has been dominated by the likes of Dogecoin and pixelated primates, but meanwhile, astute investors are turning their attention to U.S.-listed Bitcoin miners, a different corner of the digital asset landscape. These publicly traded companies have been quietly building a fortune, with their collective market capitalization skyrocketing to $23 billion by June. Moreover, they've been quietly outpacing Bitcoin's performance, a feat that Wall Street insiders would be wise not to ignore. Furthermore, they're not merely unearthing digital gold – they're laying the groundwork for the future of artificial intelligence. Their growing influence within the cryptocurrency market is undeniable. A watershed moment occurred with the announcement of a partnership between Core Scientific and CoreWeave, an AI company. This partnership represents a huge 12-year deal between Core Scientific, a heavyweight in the mining industry, and CoreWeave, a cloud computing powerhouse, for a staggering 200 megawatts of computing power. So Core Scientific is positioning themselves as a major player in the AI computing space. Now, let's look at the wild ride of Bitcoin mining company stocks. The shares of Core Scientific were relisted on January 24th this year. On the first trading day, they faced a drop of 40.5%. However, since then, they have skyrocketed by 85.4%. The most spectacular success occurred with TeraWulf, whose capitalization has gained 132.5% since the start of the year. Other stars include Iris Energy (+110.2%), CleanSpark (+45.5%), Hut8 Mining Corp (+23.6%), Bitdeer Technologies Group (+17%), and Cipher Mining (+13.8%). However, not all public Bitcoin miners have demonstrated a rise: Bitfarms (-8.25%), Marathon Digital (-14%), Bit Digital (-15.6%), HIVE Digital Technologies (-26.2%), Riot Blockchain (-37.6%), and London-based Argo Blockchain plc, whose shares are listed on the Main Market of London, lost 68.1%. Its ADRs, as well as those of Canadian Bitfarms and Hut 8 Mining, are tradable in New York. The stocks of Bitfarms and Hut 8 Mining are primarily listed on the Toronto Stock Exchange. Among Canadian Bitcoin mining-related stocks, there are also SATO Technologies Corp (-44.6% YTD), Digihost Technology (-39.8%), and DMG Blockchain Solutions Inc (-18%). **The Framing is a Key** Almost all mentioned Bitcoin miners are expanding their activities in 2024. Riot Platforms, Bitfarms, CleanSpark, and Cipher Mining boosted their hashrate in June. The US Bitcoin mining sector increased its share of the world Bitcoin production to almost 21% in June, up 2% just for one month. At the same time, some public Bitcoin miners are facing a sell-off from stock traders. What went wrong with these companies? The framing is key. A success story on the stock exchange is not only about facts and figures but also hinges on the skill of Investors Relations corporate departments to communicate essential data to investors and inspire them, tuning into their dreams and expectations. It's not least important than the corporate hash rate and Bitcoin actual production, fleet efficiency, and the electricity price for 1 kWh. Anyway, most stocks of Bitcoin miners are slated to rise in the near future, so there is a case for nuanced selected shares in the portfolio. Such a portfolio is possible to give a huge investment return. **AI Boom and Bitcoin Mining Stocks** The AI boom is a very thrilling case when we start thinking about the data centers Bitcoin miners possess. Forget gold rushes, Wall Street's eyeing a new frontier: repurposed Bitcoin data centers. Soaring AI demand needs massive data centers, mirroring the miners' insatiable appetite for energy. Investors are scrambling to fill the AI infrastructure gap, and existing Bitcoin data centers are a perfect fit. Core Scientific's mega-deal with CoreWeave is a prime example, and the phone's ringing off the hook for other miners. This high-performance computing play will imminently create a M&A frenzy in the Bitcoin mining sphere, fueled by limited data center options and surging AI demand. Bitcoin's recent halving has squeezed miners, making them hungry for new revenue streams. Investment funds see an opportunity to scoop up these distressed miners and turn their data centers into AI havens. But not all Bitcoin miners are created equal. Some will stick to pure Bitcoin mining for now. Anyway, the stocks of Bitcoin miners will be in rising demand since they reflect one of the perfect business models: investments into innovative equipment (Bitcoin miners) and mining of one of the innovative hedge assets, Bitcoin. The largest Bitcoin miners effectively cope with expenses. The average tag for mining Bitcoin, after sparking just a few days after the April halving, is now on a declining trend. The more powerful Bitcoin miners stay in the game with the average cost of Bitcoin production less than $42,000. Other players can be bought out. **At the Dawn of a New Era** The AI boom, with the interest in data centers created by Bitcoin miners, means that the demand for relevant equipment gets an additional boost. This understanding only strengthens the case for setting up an investor's portfolio in which the stocks of Bitcoin miners must have their place. Actually, we are at the dawn of a new era of stock stars. The famous Magnificent 7 has already played its role in financial history. Those tech grands that quickly understand that they must rush into M&A in the Bitcoin mining sphere will withstand the looming drastic correction of S&P 500 and Nasdaq Composite. Now we have a historical Google moment. Recall that in 1998, Yahoo! refused to buy Google for just US$1 million. The public Bitcoin mining stocks are still too undervalued and still have a big promise, so there is no reason to drop such an opportunity to invest in them. There is no doubt that before the next Bitcoin halving occurs, we will see the first $1 trillion-valued Bitcoin miner. Most of those who sell Bitcoins and Bitcoin miners' stock end up regretting it. They are left to rebuy at a higher price.
Read more