Bitcoin’s Blast from the Past

According to Glassnode’s report, we’re seeing a déjà vu with Bitcoin cycles in 2015-2017 and 2018-2022 in terms of how long it’s taking to bounce back and the drawdown since the all-time high (ATH).

In the current cycle, Bitcoin has seen a drawdown of about -37% from its ATH, which is pretty close to the -42% in 2013-2017 and -39% in 2017-2021. Plus, since the FTX lows in November 2022, Bitcoin prices are up a solid +140%, making it the strongest one-year return compared to the +119% in 2015-2018 and +128% in 2018-2022.

Exchange Activity: Bitcoin’s Trading Paradox

Despite 2023 being a banner year for Bitcoin, the number of transactions depositing funds to exchanges has surprisingly hit multi-year lows. But here’s the kicker: Glassnode data shows that the on-chain volume flowing in and out of exchanges has skyrocketed, jumping from $930 million to a staggering $3 billion – that’s a massive 220% increase.

This discrepancy between fewer deposits yet skyrocketing volume makes us wonder: what’s driving the intensified exchange activity if not retail investors? On one hand, the decrease in deposit transactions might suggest that investors are becoming more cautious about leaving their assets on exchanges, possibly due to security concerns or a desire for greater control over their funds. This is where the potential shift towards non-custodial exchanges like StealthEX comes into play. Given the FTX drama that’s still on everyone’s mind, it’s no surprise that these platforms where you can keep your private keys are becoming more popular.

There’s a serious uptick in on-chain volume showing that trading and speculation are buzzing more than ever. It seems that while investors might be shying away from depositing their funds, they are actively trading and moving large sums of money. This could be a sign of growing institutional interest, especially as we see the average size of deposits to exchanges nearing the previous all-time high of $30k per deposit, according to Glassnode.

Moreover, the fact that exchange deposits as a percentage of all transactions have dropped from around 26% in May to just 10% today, yet the decline is more modest (around 20%) when adjusted for Inscriptions, adds another layer to this narrative. Undeniably, we’re witnessing a dynamic shift in the blockchain sphere as novel transaction types emerge and new players grab their share of the limelight.

Short-Term Holders Cashing In

Short-Term Holders (STHs) have been making some smart moves lately, cashing in on their Bitcoin investments at just the right time. Glassnode’s got the stats to prove it – the STH-Supply Profit/Loss Ratio has been hovering above ~1 since January. This means these savvy traders have been playing the ‘buy-the-dip’ game pretty well, a classic move in uptrends. However, these STHs are moving hefty amounts of coins to exchanges, and the gap between what they paid and what they’re selling for is pretty sizable.

The first week of December, when Bitcoin hit $44.2k, STHs jumped into action, seizing the moment to take profits. It’s like they saw the wave coming and rode it all the way to the shore, capitalizing on the demand liquidity. This activity has put a bit of a pause on Bitcoin’s upward climb, demonstrating STHs’ sway over crypto prices.

Wrapping It Up: Bitcoin and Beyond

So, there you have it – Bitcoin’s 2023 story is a mix of triumphs, challenges, and a whole lot of excitement. Bitcoin, in its digital universe, never fails to keep us intrigued with its roller-coaster ride of strong recoveries and declines that resonate with historical patterns, even bouncing back recently despite a few bumps on the road. The play of STHs and the unpredictable ebbs and flows of exchange activities knit together a complex, yet intriguing narrative. Regardless of whether you’re in it for the highs or the lows, or simply out of sheer curiosity, observing Bitcoin’s ride is undoubtedly one to watch. 

This is a guest post by Maria Carola. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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CommerceBlock is releasing Mercury Layer today, an improved version of their variation of a statechain. You can read a longer form explanation of how their Mercury statechains work here. The upgrade to Mercury Layer represents a massive improvement against the initial statechain implementation, however unlike the initial Mercury Wallet release, this is not packaged as a fully consumer ready wallet. It is being released as a library and CLI tool other wallets can integrate. Here’s a quick summary of how they work:

Statechains are essentially analogous to payment channels in many ways, i.e. they are a collaboratively shared UTXO with a pre-signed transaction as a mechanism of last resort for people to enforce their ownership. The major difference between a Lightning channel and a statechain is the parties involved in collaboratively sharing the UTXO, and how ownership of an enforceable claim against it is transferred to other parties.

Unlike a Lightning channel, which is created and shared between two static participants, a statechain is opened with a facilitator/operator, and can be freely transferred in its entirety between any two participants who are willing to trust the operator to be honest, completely off-chain. Someone wishing to load a statechain collaborates with the operator to create a single public key that the creator and operator both hold a share of the corresponding private key, with neither having a complete copy of the key. From here they pre-sign a transaction allowing the creator to claim their coins back after a timelock unilaterally.

To transfer a statechain the current owner collaborates with the receiver and operator to sign a cryptographic proof with their keyshare that they are transferring the coin, and then the receiver and operator generate a new pair of keyshares that add up to the same private key and sign a timelocked transaction for the new owner with a shorter timelock than the original (to ensure they can use theirs sooner than past owners). This process is repeated for every transfer until the timelock cannot be shortened anymore, at which point the statechain must be closed out on-chain.

Owners transfer the entire historical chain of past states with each transfer so that users can verify timelocks have been properly decremented and the operator timestamps them using Mainstay, a variant of Opentimestamps where each piece of data has its own unique “slot” in the merkle tree to guarantee that only a single version of the data is timestamped. This let’s everyone audit the transfer history of a statechain.

In The Land Of The Blind

The big change Mercury Layer is bringing to the original version of statechains is blinding. The operator of the statechain service will no longer be able to learn anything about what is being transferred: i.e. the TXIDs involved, the public keys involved, even the signatures that it collaborates with users to create for the pre-signed transactions necessary to claim back your funds unilaterally.

Introducing a blinded variant of Schnorr MuSig2, Mercury can facilitate the process of backout transaction signing without learning any of the details of what they are signing. This necessitates some design changes in order to account for the fact the operator can no longer see and publish the entirety of a statechain’s transfer history. They are not even capable of validating the transaction they are signing at all.

In the prior iteration, uniqueness of a current statechain owner/transaction set was attested to by the operator through the publishing of the entire transfer history of the statechain with Mainstay. That is not possible here, as in the blinded version the operator learns no details at all about these transactions. This necessitates a new way of the operator attesting to current ownership of the statechain. All of this data is pushed entirely to a client side validation model. The operator simply keeps track of the number of times it has signed something for a single statechain, and tells a user that number when it is requested. The user then receives the transactions of past statechain state’s from the user sending to them, and verifies entirely client side that the number of transactions match what the operator claimed, and then fully verifies the signatures are all valid and the timelocks decremented by the appropriate amount each time. In lieu of publishing the full statechain transactions and transfer order to Mainstay, because it is designed to be unaware of all of that information, it publishes its share of the public key (not the full aggregate public key) for the current user for each statechain user. This allows any user receiving a statechain to verify the transfer history and current state is legitimate against the transaction data sent by the sender.

The operator server keeps track of unique statechains to count past signatures by assigning each statechain a random identifier at creation, stored with its denomination and its private key and public key shares (not the entire aggregate public key). The new coordination scheme for sharding and re-sharding the key is done in a way where the server passes its share of the key to the user, and the data necessary for a resharding is blinded so the server is incapable of ever learning the user’s full public key share, allowing it to create the full aggregate public key and identify the coin on-chain.

The design doesn’t even allow for the operator to know when it has signed a cooperative closure with the current owner rather than a pre-signed transaction for a new off-chain owner; it doesn’t see any details to distinguish the two cases from each other. This is safe however for users who could be attacked by someone trying to “double spend” a statechain off-chain providing a fake transaction that couldn’t be settled. Firstly, that user would see on-chain that the UTXO backing that statechain was spent. Secondly the transaction history, because the operator must sign all state updates, would only have a clear cooperative closure in the chain of past transactions. Both of these things would allow the user to refuse the transaction knowing it was not legitimate.

Statechains also allow Lightning channels to be “put on top” of the statechain by having the statechain pay out to a multisig address between two people, and the two of them negotiating a conventional set of Lightning commitment transactions on top of it. It would need to close the statechain on-chain before closing the Lightning channel so would need to use longer timelock lengths for Lightning payments, but otherwise would function perfectly normally.

Overall with the massive privacy improvements of the new iteration of statechains, and the composability with Lightning, this opens many doors for the economic viability and flexibility of second layer transactional mechanisms on Bitcoin. Especially in light of the recent radical changes in mempool dynamics and the resulting fee pressure.

It offers the same type of liquidity benefits of Ark, i.e. being able to be freely transferable without needing receiving liquidity, but unlike Ark is live and functional today. It is undeniably a different trust model than something like Lightning alone, but for the massive gains in flexibility and scalability, it is definitely a possibility to explore. 

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Twitter CEO Elon Musk has shared what he calls a “massive incentive” to get money out of bank accounts, noting “bank depositor flight will accelerate to extreme levels, even for banks that are ‘too big to fail.’” Personal finance coach and author Dave Ramsey, for his part, thinks that de-dollarization fears are overblown. In crypto news, Bitcoin’s network congestion issues began to ease this week. All this and more just below, in the latest Bitcoin.com News Week in Review.

Elon Musk Shares ‘Massive Incentive to Move Money out of Bank Accounts’

Tesla and Twitter CEO Elon Musk has shared a “massive incentive” to move money out of bank accounts, citing a significant interest rate gap created by the U.S. Treasury and the Federal Reserve. “As more people & companies realize this, bank depositor flight will accelerate to extreme levels, even for banks that are ‘too big to fail,’” Musk warned.

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Dave Ramsey Dismisses De-Dollarization Concerns — Says BRICS Currency, Chinese Yuan Can’t Take Down US Dollar

Personal finance expert and best-selling author Dave Ramsey has dismissed de-dollarization concerns and the prospects of a BRICS currency, the Chinese yuan, or the Russian ruble displacing the U.S. dollar in international trade. “They don’t have the muscle to take down the dollar,” he stressed.

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Fed Reveals 722 Banks Reported Unrealized Losses Over 50% of Capital as Concerns Over US Banking Crisis Grow

The U.S. Federal Reserve has revealed that 722 banks reported unrealized losses exceeding 50% of their capital at the end of the third quarter of 2022. “Rising interest rates are creating significant unrealized losses in investment securities and in some cases depressing tangible equity,” according to the Fed’s Division of Supervision and Regulation.

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Bitcoin Network Starts to Clear Congestion, Onchain Fees Drop by 90%

On May 7, 2023, the Bitcoin network was plagued with an overwhelming 500,000 unconfirmed transactions, causing a major bottleneck in the system. However, the good news is that the congestion has been clearing, resulting in a significant reduction in onchain fees.

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What are your views on this week’s stories? Be sure to let us know in the comments section below.

Bitcoin.com

Since 2015, Bitcoin.com has been a global leader in introducing newcomers to crypto. Featuring accessible educational materials, timely and objective news, and intuitive self-custodial products, we make it easy for anyone to buy, spend, trade, invest, earn, and stay up-to-date on cryptocurrency and the future of finance.

Image Credits: Shutterstock, Pixabay, Wiki Commons

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Tesla and Twitter CEO Elon Musk has shared a “massive incentive” to move money out of bank accounts, citing a significant interest rate gap created by the U.S. Treasury and the Federal Reserve. “As more people & companies realize this, bank depositor flight will accelerate to extreme levels, even for banks that are ‘too big to fail,’” Musk warned.

Massive Incentive to Move Money Out of Bank Accounts

Tesla and Twitter CEO Elon Musk shared Monday a “massive incentive” for people to move money out of bank accounts in the U.S. His statement was in response to Twitter user “unusual_whales” who quoted Hugh Hendry, founder of Eclectica Asset Management who ran the hedge fund for 15 years, predicting that the U.S. Treasury and the Federal Reserve may have to step in and “restrict your right as a U.S. citizen to pull money out of the U.S. banking sector, due to capital flight from the U.S. banking system.”

Musk explained that the U.S. Treasury and the Fed have created a massive gap between money market accounts (Treasury Bills) with interest rates of about 4.5% and bank accounts with interest rates of less than 1%. “That’s a massive incentive to move money out of bank accounts,” he emphasized.

This was not the first time Musk has warned about this problem. On May 2, the Tesla boss replied to a tweet about a “liquidity crisis” and “cash being sucked” into Treasury money market accounts with 4.5% interest, stating:

This is a massive problem. Doesn’t make sense to keep money in a <1% interest bank account instead of a 4.5% money market (Treasury Bill) account. As more people & companies realize this, bank depositor flight will accelerate to extreme levels, even for banks that are ‘too big to fail.’

Musk also agreed with former money manager Genevieve Roch-Decter who tweeted Monday that “Banks have successfully fooled depositors into accepting 0.4% interest on savings while the bank makes +5% on treasuries.” She stressed: “The biggest risk for banks is the consumer figuring out they can move their money out of banks and buy treasuries or money market funds themselves.”

Many people have voiced concerns about the U.S. banking crisis. First Republic Bank was seized by regulators last week and most of its assets were sold to JPMorgan Chase. It was the second-largest bank failure in U.S. history since 2008. In March, Silicon Valley Bank and Signature Bank failed. However, Federal Reserve Chairman Jerome Powell insisted that the banking system is “sound and resilient” as Fed officials raised interest rates by 25 basis points last week.

A Swedbank strategist has cautioned that the U.S. banking crisis is spreading, warning of more bank failures in a “vicious spiral.” Billionaire Bill Ackman warned that we are running out of time to fix the banking problem. In addition, the Fed recently revealed that 722 banks reported unrealized losses exceeding 50% of capital in the third quarter of last year.

In an interview with Bloomberg Thursday, Hendry described the situation of the U.S. banking system as “real bad.” The former hedge fund manager elaborated: “The panacea of the Treasury announcing that all deposits are federally insured does not solve this problem. There is capital flight — deposit flight — from the banking sector seeking yield.” He further warned: “I can actually conceive of a federal or Treasury rule coming in and saying ‘for the next 180 days, you can’t pull your money out of the banking sector.’”

Do you agree with Elon Musk about a “massive” incentive to move money out of bank accounts? Let us know in the comments section below.

Kevin Helms

A student of Austrian Economics, Kevin found Bitcoin in 2011 and has been an evangelist ever since. His interests lie in Bitcoin security, open-source systems, network effects and the intersection between economics and cryptography.