July 15, 2022
Greg Cipolaro & Ethan Kochav

Research Weekly - After the Gold Rush


  • The fireworks may be over in crypto markets (for now).
  • Texan Bitcoin miners shut down amidst a scorching heat wave.
  • A legendary bitcoin developer takes a half-step back.

Dust Begins to Settle in Crypto Markets

The recent burst of volatility in crypto markets that began with the implosion of LUNA and UST at the beginning of May has begun to settle down. With the recent bankruptcy filings of lender Celsius, exchange Voyager, and crypto fund Three Arrows Capital, plus the capital raise by BlockFi and disclosure of losses across the industry, including those sustained by lender Genesis Trading, many of the fireworks in the industry appear to be in the rearview mirror. As a reminder, prior to the ignition of the tinder that was LUNA and UST, bitcoin had been trading in the $35K - $45K range for most of 2022 and even peaked above $48K at the end of March. The events since took the asset to a cycle low price of $17.5K. As of yesterday, bitcoin trading at $20.6K.

One of the disappointing facts about the recent episode was that, while Bitcoin was a technology designed to eliminate the need for trusted financial intermediaries, it was financial intermediaries, in conjunction with poor economic design by some protocols, that were responsible for the negative headlines. Risky business practices by these institutions, like the rehypothecation of capital, zero-collateral lending, and insufficient disclosures obfuscated many of the risks that surfaced over the past 2 months. The resulting carnage in the industry led to forced liquidation of assets, including bitcoins, which negatively impacted price. While it is difficult to know whether the forced selling is over, it does appear that the flood of news has slowed down and that most of the issues seem understood at this point.

Where do we go from here? While we cannot predict the future, if lessons from past cycles are any guide, a couple of things may transpire. First, things will likely get quiet in the industry. Social media chatter (crypto has a very active public discourse on venues like Twitter) may die down, a trend that appears to have begun. Events like the crypto advertising blitz of Super Bowl LVI back in February may become a thing of the past, and media coverage could quiet down. We believe this is constructive as the industry refocuses on building rather than on the distraction that can come from constant media attention. Some of the industry’s most important technologies and companies emerged during the downturns of previous cycles. Second, regulation could be pushed to the forefront, perhaps as a response to the events that have just taken place, though things have already been in motion on several fronts. Some of the reports required by the White House’s Executive Order in March are starting to come forth, and proposed legislation has been introduced in the Senate. Third, investors may re-underwrite the asset class, likely with a renewed focus on bitcoin, partly because investors may have realized that many of the new projects and assets that sprung to life in the previous cycles did not live up to expectations and partly because they may have realized that, amongst the nascent asset class that is digital assets, bitcoin is the one with the best product-market fit. That is to say, the attributes most important to the asset class, its trustless, permissionless, and censorship resistant nature, are best suited to a non-sovereign form of money, rather than, say, a video game. Previous cycles have taught us that many of the recent cycle’s hot projects may end up falling by the wayside and never regain their former luster in the next cycle.

There is no guarantee that the future will look anything like the past. The number of past cycles from which to draw parallels is only four, including the current one. We remain open to changing narratives, use cases, investor base, and relationship to macro factors. We are confident that while the arrow of progress of this industry may not always be in a straight line, the long-term thesis for Bitcoin remains strong.

Miners Switch Off Amidst Texas Heat Wave

This week has seen a dramatic heat wave in Texas — a weather phenomenon known as a heat dome, which in addition to oppressive heat has also brought wind power to a standstill. Rising electricity demand and falling supply has meant that Texas’s grid, run by the Electricity Council of Texas (ERCOT), has been just barely able to satisfy demand. In this environment, it has been economically advantageous for Bitcoin miners to turn off their rigs at times. Bitcoin mining facilities tend to fall into two categories: those without long-term purchasing power agreements (PPAs) and those with PPAs. Miners without PPAs are usually subject to the daily price volatility of electricity, making them price takers. When weather events like those of this week occur, it may be advantageous to turn off rigs during times of potential electrical shortfalls, because the price of electricity is high. Miners with PPAs face the same economic logic, except instead of turning off rigs that are too costly to mine, they sell pre-bought electricity back to the grid at a profit when prices are high. While miners with PPAs are much better off during peak demand hours, the result is the same; electricity is supplied back to the grid.

This dynamic illustrates the grid benefits long touted by bitcoin miners. Other industrial operations, or even traditional data centers, need consistent uptime to properly function; they cannot simply turn off at will. Miners, on the other hand, face lost revenue by turning off, but this simply scales linearly with the amount of downtime. There are no unfulfilled customers or ruined work products. This means that when the grid is constrained and electricity prices are high, miners can make the simple economic decision to temporarily turn off. As a result, miners are unlikely to be the marginal demand that takes down a grid. Rather, by increasing baseline demand, miners incentivize the production of more power assets that can be freed up in a time of stress.

In other news, the miner selling of bitcoin that we highlighted in our letter a few weeks ago has accelerated in the last month, with publicly listed miners selling more than twice as much bitcoin in June (-12.8K) as they did in May (-5.2K). Total public miner balances are now down to 35K, or about $670M at current prices.

A Legend Backs Away from Bitcoin, Sort Of

Last Thursday, at a weekly meeting of Bitcoin Core developers, Pieter Wuille, a prolific technical contributor, announced that he was renouncing his maintainer status in the Bitcoin Core project. This means that he is giving up his ability to directly make changes to the Bitcoin Core implementation on a software development platform called Github. Pieter Wuille, who is originally from Belgium, is one of the most influential developers in Bitcoin’s history. He shepherded some of Bitcoin’s biggest developmental upgrades, such as seed phrases for wallets, Segregated Witness (SegWit), and, most recently, Taproot, which was implemented just last year. However, this does not mean that Wuille is no longer working on Bitcoin, and in fact he is still planning to work on long-term projects like miniscript, a language that allows for easier crafting of more complex script types, as well as a new peer-to-peer networking protocol that would allow nodes on the Bitcoin network to send each other encrypted information. Since development on the Bitcoin Core project is so consensus-based, the maintainer role is more procedural than creative. It effectively means reading through code proposals, ensuring that they are properly signed off on, and merging them into the main code base. There are currently six active maintainers, with American developer Gloria Zhao replacing Wuille, and eleven other individuals who have historically held this status. It is also worth noting that Pieter Wuille is retaining his maintainership on a separate but related project called secp256k1, which defines many of the cryptographic algorithms that Bitcoin uses and in many ways some of the most important code associated with Bitcoin.

Market Update

This week saw price declines across equity and bitcoin markets, with bitcoin down 5.7%, the S&P 500 down 2.6%, and the Nasdaq Composite down 3.2%. Bonds were mixed: Investment Grade Corporate Bonds were up 1.0%, High Yield Corporate Bonds decreased 0.2%, and Long-Term Treasuries increased 2.4%. Gold fell by 2.7% on the week as real yields and inflation expectations were muted.

Important News This Week


NYDIG to Partner with New York Yankees — NYDIG

Celsius Files for Chapter 11 Bankruptcy — Celsius

KuCoin to Hire 300 New Employees — CoinDesk

Binance May Have Served Iranian Crypto Traders — Reuters

Merkle Manufactory Raises $30 Million — The Block

Circle to Provide Full Breakdown of USDC Reserves — Circle

Regulation and Taxation

U.S. Treasury Releases International Crypto Framework — U.S. Treasury

U.S. Urges Japan to Crack Down on Crypto Russia Sanctions — Financial Times

U.S. Treasury Requests Comments on Crypto Development — U.S. Treasury

SEC Weighs Waving Some Crypto Rules — Bloomberg


The OP_Return Wars of 2014 — BitMEX


Texas Miners Power Down Amidst Heat Wave — Decrypt

Upcoming Events

July 28th – Next FOMC interest rate decision

July 29th – CME bitcoin futures and options expiry

August 10th – July CPI data is released

Thanks for joining us again this week. Please reach out with any questions or comments.

The NYDIG Team

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