What matters and what doesn't in the cryptocurrency markets

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Steve Sokolowski
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What matters and what doesn't in the cryptocurrency markets

Post by Steve Sokolowski » Tue Jul 13, 2021 8:28 am

With the cryptocurrency market - and particularly bitcoin - about to reach an inflection point where prices will break up or down, I thought it worthwhile to discuss some of the issues that will, and will not, affect which direction the trend breaks.

To understand how which factors are important, think back a step about the reason they could be important. Many people in the media and on twitter are reasoning from erroneous or obsolete facts, polluting the Internet with useless data. When the trend is down, people come up with a lot of negative news to explain it, and they find positive news when the trend is up. Let's start with the things that aren't important, because there are a lot of them.


The list of unimportant stuff

Clean energy

One of the most common news segments of the past few weeks has been that proof-of-work is horribly energy-inefficient, wasting enormous amounts of electricity that could instead be spent providing power to [newspaper author inserts some figure here] number of homes. Whether you view proof-of-work as a waste of energy isn't important for the purpose of this article, and that can be debated elsewhere.

What should be obvious to most people is that every time people are presented a choice of buying a product or service vs. saving the environment, people will always buy the product or service. The car market has almost entirely shifted to SUVs over the past ten years, despite everyone's knowing how SUVs pump out far more pollution than cars do. There are some environmentalists who refuse to drive cars, but they aren't impacting car manufacturers' decisions because they aren't buying the product.

If proof-of-work coins become indispensable for the economy to operate, then miners will mine them. The people who spend them won't care, and those who protest by not mining won't have any say in the energy used by people who do mine. Mining is even worse than cars, because local governments can restrict car usage to combat climate change. It's not possible for anyone to mandate that mining be "green," because the miners will just relocate to another place where cheaper fossil fuels are permitted.

On-chain metrics

It used to be the case that so-called "on-chain metrics" - number of addresses, volume of transactions, exchange wallet balances, size of wallets - was important. Several years ago, one could infer the state of the markets by, for example, looking at whether there were a lot of small wallets. A significant increase in the number of small wallets indicated that new small buyers were entering the market.

The advent of cryptocurrency interest accounts, as I described at https://prohashing.com/guides/earning-i ... currencies, made on-chain metrics obsolete. One can't tell how many new entrants there are when these new entrants are mining or buying their coins and immediately sending them to huge borrowers, like Gemini. In turn, Gemini, BlockFi, and other companies further aggregate their coins with the same "custody providers," like BitGo.

More and more of the market is being sucked up by interest providers, just as the advent of large banks consolidated lending hundreds of years ago. Most transactions are now being conducted off-chain, and the changes in on-chain metrics are being overshadowed by these market changes in lending and borrowing.

Usage for commerce

Even though one might expect that the most obvious use for a currency is to spend it, the number of providers accepting bitcoins has never been a critical factor in bitcoin's value. Indeed, Purse.io discounts for puchasing Amazon items are so low now that I stopped using the site. I can get 5% in cashback bonus on a credit card after losing only 0.2% in fees to sell my bitcoins at Bittrex, without all the cancelled orders some Purse sellers cause.

In 2014, everyone looked forward to how the day would come when large retailers like Wal-Mart or Newegg or Tesla would accept bitcoins. Two of those companies already did, and they stopped accepting them, and the price of bitcoins somehow remains at $33,000 without any significant payment adoption. As a result, regardless of what does influence the markets, it's pretty clear that commercial spending will probably never be a factor that influences cryptocurrency prices.


Some blamed the start of the most recent crash on Biden's plan to raise capital gains taxes on people who earn more than $1m per year.

I don't think that much needs to be said to debunk the tax issue, but I'll repeat it anyway just to be clear. If I make $2m per year, then I'm not going to change my lifestyle so that I "only" earn $999,999, just so that I pay fewer taxes on under $1m in income. A 20% increase in the tax rate still provides me with $600,000 in additional income on the earnings between $1m and $2m. $600,000 seems like a lot of extra income, increased taxes or not.

If the taxes were directly targeted at cryptocurrencies to the exclusion of other assets, then I would change my mind and argue that they could suppress coin prices. However, the proposed tax increases apply to all assets. The real danger from the tax increases is people renouncing citizenship in anticipation of future gains, or in not working as hard to build a business, not in burying money in the ground so it earns nothing. Those two dangers don't significantly affect the market for cryptocurrency.


One big fad nowadays is the creation of proof-of-stake coins, or of ERC-20 tokens, rather than traditional mineable coins. Some believe that proof-of-stake is more secure than proof-of-work, or that proof-of-stake props up the price of a coin or token.

As the difficulties in switching Ethereum to proof-of-stake have showed, proof-of-stake isn't going to complete a takeover of all coins anytime soon. It is possible that there will be a temporary bubble in Ethereum in the coming months as version 2 gets further along, but the bubble will be due to investor emotion and the other improvements in Ethereum rather than any supposed benefits of proof-of-stake.

Within 5 years, every single spare resource in the world will be used for proof-of-work. We've already seen that with CPUs (Monero), GPUs (Ethereum Classic will likely dominate), ASICs (Bitcoin and Litecoin), various coins that require a lot of memory to mine, and disks (Chia). As the failure of the Lightning Network shows, people are voting with their feet that the best way to increase network capacity is to create more coins. The next big deal will be when someone creates a "proof of captcha" coin where the resource is human attention, and then we'll see millions of people being hired to solve the captchas and earn block rewards. Imagine the horror in the news when someone releases that coin.

The halving cycle

The bitcoin halving cycle used to matter when the change in coin issuance was significant. The inflation rate for bitcoins right now is 1.77% per year, which means that if the halving occurred today, the actual decline in inflation would be around 0.9%. That's less than the consumer price index rose in the past few months!

By contrast, when there were only 10.5 million bitcoins and the first halving occurred, the inflation rate declined from 25% to 12.5% - a change more than 20 times what that at the time of the next halving.

It it debatable that there ever were four year cycles in cryptocurrency - for example, many people have tried to rewrite history to claim that the two bubbles in 2013 were actually a single bubble, since that fits better with the four-year narrative. In fact, for the first five years of bitcoin's existence, the actual cycle length was 236 days. The confusion was evident among some people in early August 2014 when it became clear that the 236-day price increase had stalled out, but the crash hadn't yet started. For example, see this July 24 post, where I stated I was bearish because an unknown change in the fundamentals had caused existing models to be inaccurate: A few thoughts - Thursday, July 24, 2014.

Perhaps a similar confusion has now taken hold, where people understand that the four-year cycle has broken, but don't know what's next. Whatever the case, the change in inflation is no longer sufficient to support four-year cycles.


The actions of the Chinese government are a welcome development for freedom-loving people around the world. Now that China has forced out an entire industry from its borders, they can no longer mount 51% attacks on coins when they decide to flex their power.

Cryptocurrency has been "banned" in China for a long time. Those who remained involved were often using VPNs and other illegal means to trade and spend. China will eventually have no choice but to allow the use of cryptocurrencies within their borders; in the meantime, the actions they are taking just delay the inevitable and cede power to other countries. If the current lower prices can be ascribed to Chinese miners, they will rebound once the miners arrive elsewhere.


A huge amount of effort has been devoted towards developing privacy coins like Monero and ZCash, and towards adding privacy features to existing coins, as the Bitcoin Core developers are proposing to do now.

Experience in other areas of the economy, however, teaches us that while people say that they care about privacy, what they actually do fails to support that assertion. If people did care about privacy, then they would close their facebook accounts, quit Instagram, and set up their own E-Mail servers instead of allowing Google's AI to scan and ad-target every gmail message they send. People visit reddit and complain about "doxxing," and then use their real name and image on facebook to post the most vile and hateful political statements.

Except for the most hardened criminals, who make up an ever-decreasing proportion of cryptocurrency users, privacy features are not a factor in whether cryptocurrency succeeds of fails. If they were, Monero would be the dominant coin right now because it is a better product that provides better privacy at a far better price. But for whatever reason, people won't even use Monero despite its transactions costing 300 times less to send than bitcoin's. Some ransomware criminals actually even accept bitcoins because their victims won't pay in Monero.

Social media

Social media is a trailing indicator to price, not a leading indicator. Most of the comments on social media react to the wild changes in the markets, and the same news is treated differently depending on which way the price is moving. Additionally, these comments are usually one-liners that provide no useful information or context.

Another useless indicator is the "Fear and Greed index," which purports to recommend that viewers buy when there is fear, and sell when there is greed. However, I've found that by having sold 100% of our bitcoins as soon as that index switched to "fear," we've earned over $100,000 more than we could have if we had waited. If anything, you should buy when the index changes to "greed" and sell when it switches to "fear," not the other way around.

The list of things that actually matter


Now that I covered what one should ignore in the endless abyss of online discussion, let's start with the things that actually do matter. Near the top of the list is coin development.

We've probably mined around 1,000 coins at Prohashing, 200 of which are currently available. Of the coins we no longer mine, the most common reason for discontinuation is that people stopped trading them at exchanges because the developers didn't add any new features. Most of the top coins by market capitalization have functioning and active development teams.

Bitcoin is one of the notable exceptions to this rule. The coin remains #1 because it was the first, but the Core developers stopped being able to agree upon any significant changes years ago. Instead, the extent to which bitcoin can change is limited to minor improvements like the signature changes in the upcoming fork in November.

One of the major reasons that Ethereum has performed so well during the past two years is because of active and focused development. While bitcoin's developers continue to wage the past wars over the blocksize and oppose hard forks even over less contentious issues, Ethereum's developers are going to essentially throw away their entire existing network. Ethereum langished in 2017 through 2019 when its developers became distracted with work that was unrelated to capacity upgrades, and they rightfully received criticism for that distraction. Now that the Ethereum developers have refocused on capacity, the #1 foe of all coins, the active development and willingness to fix problems is the most important reason why I believe that Ethereum will become the #1 coin by both market capitalization and transactions.

Long positions

Margin traders - particularly those in long positions - have been one of the most accurate predictors of where the markets are headed over the past six months. For an unknown reason, people continue to long bitcoins, losing their savings over and over with every panic.

When the USDC interest rates are between 9.5% and 11% at the top lenders, one knows that there is a ridiculous debt bubble that needs to pop before any upward movement is going to happen. While I never wish ill upon anyone, the reality is that the only way that people are going to learn to stop borrowing money for margin trading is by not having any money left to use as collateral.

Before a recovery occurs, the USDC borrowing rates need to fall towards typical CD savings rates, as low as 3%, and the number of long positions in bitcoin needs to remain below the number of shorts for an extended period. Until then, Prohashing has been selling 100% of all coins it mines to USDC and taking advantage of these insane interest rates from the people losing money again and again. We expect to earn about $4,000 in USDC interest in July alone.

There isn't any other investment in the world where you can get 10% where the only risk is that of the party holding the asset failing, and where the asset itself has almost zero chance of losing value. Why should anyone right now be holding bitcoins when they are in a doldrum, and they can earn 9.5% in an asset with near zero risk?

The margin liquidations are causing the crashes, but it's important to understand that the high stablecoin interest rates make it more attractive to hold stablecoins during these periods of low volatility, and that people laughing at the money margin traders are giving to us are unloading volatile coins (like us at 0.3 BTC per day) to get those high interest rates. There isn't going to be any demand for volatile coins until the stablecoin rates approach the volatile coin rates.

Company integration

While actual spending on products doesn't seem to affect the price of cryptocurrencies, the number of companies integrating their payment systems with cryptocurrencies does. We've seen Robinhood, Square, and PayPal serve as catalysts in the past.

The next round of integrations I'm watching is that of banks and credit card companies. Some time, likely within 6 to 12 months, one of the big banks is going to announce that they will offer interest-bearing bitcoin and ether-denominated accounts. Their interest rates will likely be lower than those of Ledn, but that won't matter, because the banks will engage in promotions with existing customers to open accounts in both dollars and bitcoins for some sort of reward.

Another development for which I'm waiting is the ability to pay debts to credit card companies in cryptocurrencies. USDC and other regulated stablecoins are likely to be the first accepted coins. This offering is not the same as the existing credit cards offered by BlockFi, Gemini, and others, which pay rewards in bitcoins. At least for me, I don't find those cards very attractive, as my goal is to be able to diversify into more dollars without using the legacy financial system, not to accumulate 1.5% of small purchases that is inferior to the rewards from the 2% Citi Double Cash card.

In both of these cases, the critical step is that it will become possible to not use the legacy system at all. As soon as I can pay a credit card with any coin, I will close all of my accounts in the legacy system. Coins are faster, pay more interest, and I don't have to trust banks with them to pay people. But credit cards still give cashback rewards, so for now, it's cheaper to transfer value to the legacy system to use credit cards.

Hype cycles

Hype cycles will continue to be important in price appreciation. I stated above that I don't think four-year "bubble" cycles will continue as before, but I do think that there will be cycles of hype that kick off in anticipation of some upcoming event, or which simply happen spontaneously because a lot of people just happen to buy a coin at the same time at random. There may even be a small hype cycle in anticipation of the next bitcoin halving, which will be almost entirely due to hype rather than the inflation effects of the event itself.

The next major event is likely to be the Ethereum network's upgrades. Once Ethereum moves to proof-of-stake, but before it enables sharding, the ETH network won't actually be any more capable than it is today. During that interregnum, a lot of hashrate is going to move to Ethereum Classic as it becomes the most profitable coin, which will eliminate the past threat of criminal activities and 51% attacks that Nicehash allowed to occur with that network. In turn, the reduced risk of ETC rollback will then allow contracts that were hobbled by high gas costs on Ethereum to be redeployed on Ethereum Classic with minimal effort. People are going to pour money into ETH and especially ETC in anticipation of these events, creating a hype cycle feedback loop.

Being "backed" by something

Some people like to state that bitcoin isn't "backed" by anything, like dollars are, and therefore the currency will never succeed because eventually people will stop believing in it. In the case of dollars, the backing is that taxes are owed in dollars. Indeed, I exchange 50% of the interest paid to me in cryptcurrencies every month for USDC, because that money needs to be retained for the payment of taxes the following year. Even though I'm very confident that ETH will be worth more, and am somewhat confident that BTC will be worth more, before the taxes are due in April, one obviously can't take the risk of being unable to pay the taxes by holding the tax payments in a different currency.

Another reason I believe that ETH will become #1 is because it is, indeed, "backed" by something that bitcoin is not. Gas is paid in ETH, so even if one doesn't care about the value of ether itself, one still needs to exchange ERC-20 tokens for ETH to execute contracts. A quick look at one of the ETH blocks we've mined shows exactly how critical owning ether is - 20% of the transactions in a typical block end up wasting the sender's ether because the destination contract is out of gas.

You can believe in USDC or OmiseGo, but if you and the company that created those contracts doesn't own enough ether, then your token doesn't function. Having a Ledger Nano X display an error message that you can't send USDC because there is no ETH associated with the address is "backing." Bitcoin does not have backing, as there is no other asset that requires bitcoin to spend or function.


Ransomware is a scourge of the world, one that Joe Biden is finally and rightfully becoming angry about. Yet, little action is being taken against it. It's long past time that the United States start with targeted but severe DDoS attacks to bankrupt ISPs in Russia that harbor the criminals that perpetrate the attacks. The attacks would shut off innocent customers, but perhaps those customers would then pressure Putin into taking action so their Internet service is restored. Additionally, paying ransoms should be a Federal crime; as it stands now, companies have little incentive to invest $5m into security when they can just pay $1m to recover - even if they get attacked five times.

Ransoms themselves aren't a driving force in bitcoin's development; paid ransoms are a small fraction of the transactions that cross the bitcoin network every day. What the ransoms do is to draw attention to the ransomware problem, and to focus people on the need for strict regulations against wallet providers, exchanges, and (to a lesser extent) merchants to prevent processing of ransoms. We'll go into regulations in the next section.


Increased regulations are both a drag and a boon for cryptocurrencies. The drag is limited and occurs for a short time, largely because some traders have become accustomed to panics every time new "regulations" are announced. Once regulations take effect, the impact is almost always positive - driving criminals out of cryptocurrency or underground, while elevating legitimate businesses that provide services to the average consumer.

One example of a regulation that caused price gyrations was the advent of the New York BitLicense. The license has many flaws and caused concern at first. One of those major flaws is that the BitLicense makes it impossible for anyone except the largest businesses to operate in New York. On the other hand, if you are a consumer, the BitLicense has been a godsend. I specifically recommended companies in the "earning cryptocurrency interest account review" article because they complied with the license. The license mandates detailed requirements that prove that the company is handling money well.

In the long run, regulations increase price, but in the short term, the small number of criminals who have abused whatever is being regulated leave before the larger number of honest companies join, creating a gap in expectations.


The most important development this year for cryptocurrency has been stablecoins, and in particular, regulated stablecoins. The growth of USDC has been an astronomical 26-fold over the course of the past year. Meanwhile, the disreputable Tether's market capitalization has actually declined over the past two months and now stands at only twice that of USDC. The decline of Tether in favor of USDC is a welcome improvement.

Tether is currently the 10th largest holder of commercial bonds in the entire world. Stablecoins are becoming so huge that the US government likely only has a year or two to create an ERC-20 token backed by the Federal Reserve, or to cede the global financial system to the stablecoin companies. Because many stablecoins are backed by debt and not by cash, a panic in the bond market could cause a financial crisis if a stablecoin collapses.

A Federal Reserve stablecoin would be far better than company stablecoins, removing another layer of potential failure for consumers. That said, a Federal Reserve token is unlikely because the banking industry would lose half its value overnight, and banks would invest enormous amounts of money into campaign contributions. Thus, private stablecoins are here to stay.

Everyone who is involved in cryptocurrency needs to pay attention to stablecoins, if only because the big question during the immediate future is whether volatile coins like bitcoin will become the primary currency, or whether the previous decade was a buildup to the widespread use of stablecoins, which will come to dominate the world's banking infrastructure.


If I had to write a short summary of all the things that don't matter, they could probably be summed up by "ignore what people say." If I had to write a short summary of all the things that do matter, they could probably be summed up by "pay attention to what people are doing." As in real life, most people are liars. They talk big, but then don't actually follow through with what they say.

In cryptocurrency, the media creates a narrative, and interviews people who make predictions in a very cursory examination of the topic. "The media" includes social media, which is even worse by allowing people who have never done any research whatsoever to provide opinions on things they don't know about.

Anyone who does some basic research and thinks backwards a few steps will understand that the key to predicting future price trends is to look at what people are doing.

What people are actually doing right now is earning interest, ruining themselves with margin longs, spending ERC-20 tokens and stablecoins, and relocating (not decommissioning) miners. That's why I'm selling all our bitcoins to lend as USDC in anticipation of a breakdown. For the 2022-2025 period, ETH and ETC are going to dominate, with ETH becoming #1, as smart contracts become the primary use case for cryptocurrency. Bitcoin may retake that position eventually, but corporations and governments buying large numbers of bitcoins is not what people are doing right now.
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Re: What matters and what doesn't in the cryptocurrency markets

Post by -MaVerick- » Wed Jul 14, 2021 6:10 am

As recent events worldwide perfectly demonstrated, don't listen to random YouTubers, especially when it's about money...and health crisis issues. When it comes to our beloved hobby, while this was an interesting read I'll stick to see everything crypto related as gamble. Many great possibilities but also always the danger of failing hard with no real indication of why and how.
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Re: What matters and what doesn't in the cryptocurrency markets

Post by Banished_Privateer » Wed Jul 14, 2021 2:09 pm

Clean energy is important just for political reasons and it will look good in media. Also it will maximize mining efficiency in terms of costs, so that's always good. Just like your criticism on social media, these are typically the ones behind huge crashes. Bad news get released and prices can drop 60-90%. Same announcements of huge events can 'pump' the price. Basically people buy the rumor sell the news.

On topic of use for ecommerce, I think there are cryptos that serve well that purpose and Dogecoin had a great and successful adoption by the market. Plenty of places accept it and it actually serves better for payments than BTC or ETH and it's 'fun'. Most of the time spending money is not really considered as fun, the paradox of Dogecoin is that it has the very opposite effect. It still uses quite old tech and the fees became quite high with price run, but I am pleased to see active development that especially picked up the pace since beginning of 2021.

When it comes to discussion about PoS, you should look away from ETH and rule it out. That's technically the worst example that can be given for any PoS discussion most of the time, because it started as PoW and it's trying to transition into PoS for the past years, doing it really slowly and with plenty delays along the way. If you really want to get into detail about PoS topics, look at successful projects that used this algorithm since the very beginning and were designed this way, just like ADA - Cardano. There is also Polkadot, Cosmos and plenty other projects with interesting solutions and tokenomics.

About the 4 year cycle and 2013 events... People say whatever they see, they call things whatever they want. I would say that 4-year cycles don't exist and 2013 was single cycle that you could call double-peak cycle. Any cycle is unique and none of them are ever the same. What we can actually notice is that we have lengthening cycles, every consecutive one takes more time. We also have diminishing returns, As in first cycle we could get 1000x return, next was 100x, and the following might be 10x (just random example figures), it's only logical that it takes more volume to move large market cap assets higher. As bad as it sounds, it is also corelated with decreasing volatility. BTC very likely won't bring you the best ROI compared to other cryptos, but it dictates the market conditions and is more 'stable' and less volatile than the rest of crypto tokens.

On Ransomware: crypto are not to be blamed for any of that, especially lack of security. First of all, like the recent SolarWinds ransom attack, they had a password protecting their servers set as 'solarwinds123'. They failed to notify everyone about the malware since mid-2020. They failed on so many levels, that it's only their fault about the whole situation, while others try to spin the guilt on crypto for some reason, using it as a scape goat. Actually using BTC for ransom payments is not the best idea, since Feds and special agencies can trace these very easily, they are on public blockchain and as the Pipeline ransom attack showed, the majority of them got traced and somehow recovered. People behind that attack must have done something really stupid like getting located or sending it to central exchange.

Also fun fact about proof of captcha, you should check out Basic Attention Token :) Not the same, but somewhat relevant. Same for games that allow you to earn crypto, in some places in the world like Argentina you quite literally have people play them for living, as it earns more than their minimal wage.
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Re: What matters and what doesn't in the cryptocurrency markets

Post by jreysack » Thu Jul 22, 2021 5:33 pm

where are you getting that high of interest on usdc? I'm using blockfi and not seeing anything over like 8%
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Re: What matters and what doesn't in the cryptocurrency markets

Post by Steve Sokolowski » Mon Jul 26, 2021 11:01 am

jreysack wrote: Thu Jul 22, 2021 5:33 pm where are you getting that high of interest on usdc? I'm using blockfi and not seeing anything over like 8%
Ledn offers 9.5% on USDC - but that almost certainly won't last into August, given that we alone pumped half a million dollars into their lending portfolio. All the other companies are lowering rates and they will have to as well.
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Re: What matters and what doesn't in the cryptocurrency markets

Post by jreysack » Mon Jul 26, 2021 6:38 pm

LOL nice, although not nice they're going to lower it. I know blockfi is at 8.5 for amounts up to 50k for Dai, and 7.5 for GUSD,and a couple others.
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