David Canellis

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Decentralization is a spectrum.



No doubt you’ve heard this before. After all, Bitcoin started out much more centralized than it is today: There were <a href="https://bitcointalk.org/index.php?topic=194078.0">check points</a> and single-digit node counts, and the hash rate is <a href="https://blockworks.co/news/satoshi-bitcoin-holdings-wallet-123b">believed</a> to have been concentrated mostly with Satoshi for at least the first year.



But a spectrum needs two dimensions, otherwise it’s just a scale.&nbsp;



For blockchains (and peer-to-peer networks more generally), the other dimension would be “interestingness” — the more decentralized something is, the more interesting it is.



Pre-Bitcoin, e-gold was the most successful alternative digital currency. And it was still very interesting, even with its overt centralization.



Seventeen years ago, in 2008 (and five months before Bitcoin’s white paper), the public got <a href="https://www.offshorealert.com/us-judge-rejects-e-golds-argument-that-it-is-not-a-money-transmitter/">confirmation</a> that e-gold’s legal appeals couldn’t save it: A federal judge had ruled that e-gold was in fact a money transmitter by the government’s standards.



The company and its execs would officially stand trial for operating as one without a license, with four criminal counts against their names, for which they’d plead guilty.



At the very surface level, e-gold was not totally dissimilar from how some stablecoins operate, only it was launched in 1998, when there was no such thing as a cryptocurrency.



Users would first exchange fiat currency for digital grams of gold that would then be credited to their e-gold accounts. Gold &amp; Silver Reserve Inc., an offshore company registered in Saint Kitts and Nevis, physically backed each of those digital grams with actual gold — first in a safe deposit box in Florida and later across bank vaults in London and Dubai.



E-gold users could then cheaply send gold-denominated payments to other users, and balances could then be cashed out via supporting money exchangers.



All transactions were instant, irreversible and tallied by a private ledger operated by the company on a centralized server. Gold &amp; Silver Reserve Inc. charged a minor fee for the trouble, and allowed accounts to be opened without any identity checks, making each user pseudonymous.



E-gold was properly massive for its time. At its 2006 peak, it was second only to PayPal when it came to internet-native payment processing: over 5 million registered <a href="https://www.wired.com/2009/06/e-gold/">accounts</a> spread all over the world, with active users pushing $2 billion worth of transactions per year.&nbsp;



But the cumulative value of all the e-gold in circulation — which we’d probably describe as its market cap — was low by today’s standard. It was only $85 million, converting to around 3.8 metric tons of physical gold to back each unit.



Tether Gold, probably the closest we have to a modern crypto equivalent of e-gold, otherwise has a circulating <a href="https://www.coingecko.com/en/coins/tether-gold">supply</a> of over $800 million, but only about 134,000 transactions in the token’s entire <a href="https://etherscan.io/token/0x68749665ff8d2d112fa859aa293f07a622782f38">history</a>. Around 7,250 Ethereum addresses contain at least some Tether Gold, although those include exchange hot wallets holding balances on behalf of an unknown numbers of users.



E-gold unravelled precisely due to its lack of decentralization. In the simplest terms, the feds could shut it down because it was run by a small number of people who controlled all of its functions, from the buying and selling of gold reserves to server maintenance and lax fraud prevention.



E-gold was interesting on a libertarian level — and even with cypherpunks — until the risks of its centralization became glaringly obvious.&nbsp;



Bitcoin fixed this.



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digital gold

Before Bitcoin: Digital gold in the ’90s was interesting, until it wasn’t

Michael Bodley

<div id="highlights-block_621909b75a046" class="highlights">
 <ul>
 <li>Bitcoin and ether both plunged more than 10% on Thursday before recovering to notch modest 24-hour gains</li>
 <li>Crypto funding behind the conflict raises the possibility of quicker regulation, industry participants say</li>
 </ul>
 
</div>



While the crisis in Ukraine roils global equity and digital asset markets, bitcoin and other cryptocurrencies are increasingly seen as risk assets in the eyes of institutional traders.



Recent shocks have <a href="https://cms.blockworks.co/bitcoins-plunge-on-ukraine-invasion-undermines-status-as-digital-gold/" target="_blank" rel="noreferrer noopener">hindered the premise</a> of bitcoin as digital gold, or a store of value — its standing as a bellwether investment in times of turmoil has likewise been called into question.



Bitcoin and other cryptocurrencies, including ether, plunged more than 10% Thursday as the Russian incursion into Ukraine started, before bouncing back to book modest gains on the day. Digital assets also continued to rise Friday as traders appeared to shake off the impact of medium- and longer-term implications of the invasion.



Kevin Kang, co-founder of digital asset hedge fund firm BKCoin Capital, attributed the recovery to “short covering and equities recovering earlier losses.”



Indeed, bitcoin has traded in near tandem with stocks as of late. Wary of the correlation, big-time traders have largely stayed on the sidelines of the latest market moves, according to Rance Masheck, CEO of trading platform <a href="https://www.ivestplus.com" target="_blank" rel="noreferrer noopener">iVest Plus</a>.



“Overall, [crypto] moved with the way the US market moved,” Masheck said. “Some of it came back, just like the market came back, but the big players aren’t jumping in or bailing out.”



iVest data show a decline of about 50% in bitcoin trades over $100,000 from the same time last week — plus, the firm recorded a net outflow of a modest $19 million, indicating few directional bets.&nbsp;



Bitcoin was up 9.6% in the last 24 hours as of midday Friday, while showing a weekly decline of -2.9%. Ether, meanwhile, increased 10.7% in the last day, paring week-long losses to -5.6%.&nbsp;



Volatility shows few signs of slowing.



“Historically, the day of the invasion marked a local bottom in the market as uncertainty dissipates, but there are a lot of talks about how Russia may be just starting and may go into Poland and other near NATO nations, which will put the US in a limbo,” Kang said. “There are still a lot of uncertainties in the market. We expect the volatility to continue.”&nbsp;



Brian Brooks, CEO of bitcoin mining and crypto technology company Bitfury, said bitcoin is trading as it should in a risk-off environment where investors “are going to retreat to Treasurys and cash for a short period of time.”



Other macro factors are at play behind recent market volatility, too, he said — including looming tax bills on the horizon that traders may not have budgeted for. A recent drying up of liquidity hasn’t necessarily helped matters either.



“Even though bitcoin in part has an element of store of value to it, it’s still thinly traded enough that it’s acting more like a risk asset,” Brooks said. “Other than bitcoin, the right way to think about crypto tokens is they’re risky internet stocks — and internet stocks are way down.”



Meanwhile, the growing prospect of rising interest rates in the US — expected as a means to tamp down runaway inflation — is likewise weighing on crypto markets, according to David Tawil, president of cryptocurrency hedge fund firm ProChain Capital. Ongoing supply chain jams are also roiling traditional financial instruments and digital assets, Tawil said.



“Clearly, the downdraft in the asset class has been because the dominant feature has been, essentially, a growth-tech story, a risk-on asset,” Tawil said. “Therefore, when we get into a risk-off environment, it’s going to trade down, including inflation, rising rates and now geopolitical instability.”



The Ukraine tensions also raise the possibility of sanctioned Russian oligarchs turning to crypto to transfer money as banks have cut them off, Masheck said — as well as the government itself tapping digital assets to circumvent traditional finance. It heightens the prospect of US regulators taking a faster pace as both Ukraine and <a href="https://cms.blockworks.co/as-russia-tests-digital-ruble-plans-for-broader-crypto-regulation-are-uncertain/" target="_blank" rel="noreferrer noopener">Russia</a> have moved to legalize and regulate the space.



“Obviously, those sanctions will have some level of impact, but crypto allows for a little bit of a circumvention of some of that,” he said.



Masheck and Brooks both expect bitcoin to behave less like a risk asset and lose its correlation to stocks as the asset evolves.



“As we move forward here, I think we’ll start to see more of a divergence between what US markets are doing and what’s happening in crypto,” Masheck said.



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Bitcoin

As Ukraine Crisis Underscores Bitcoin as Risk Asset, Volatility May Be Here To Stay

Luke Conway

<div id="highlights-block_6217da86ec377" class="highlights">
 <ul>
 <li>Increasing institutional investment in bitcoin tightens its correlation with stock movements</li>
 <li>Lack of understanding of bitcoin’s fundamental properties may be hindering its adoption as a risk management tool</li>
 </ul>
 
</div>



As Russian troops poured across the border into Ukraine this morning, bitcoin’s price <a href="https://cms.blockworks.co/bitcoin-slides-below-35k-amid-putins-call-for-full-scale-invasion-of-ukraine/" target="_blank" rel="noreferrer noopener">plunged</a>. Gold, meanwhile, surged, although it pared its gains by early afternoon in the US.



The sharp divergence, which echoes movements in light of other recent news, such as the <a href="https://cms.blockworks.co/jobless-data-makes-march-rate-hike-more-likely/" target="_blank" rel="noreferrer noopener">potential</a> for increased interest rates, have shown bitcoin to have a stronger <a href="https://cms.blockworks.co/bitcoin-trading-like-stocks/" target="_blank" rel="noreferrer noopener">correlation</a> with equities like tech stocks than it does with gold or other safe haven assets.



Safe haven assets have always been considered hedges against market turmoil or currency devaluation. One of the biggest selling points bitcoin proponents have made is that it could be an even better hedge against inflation or market uncertainty than gold. But how and why?



<h3 class="wp-block-heading">The case for bitcoin as digital gold</h3>



The theory behind bitcoin’s being the digital version of gold is based on its supply and disinflationary nature. Those who help run the Bitcoin network are rewarded with bitcoin for their service, and the amount of bitcoin they earn is cut in half every four years. This means that the rate at which new bitcoin enters circulation is steadily decreasing until these rewards run out, leaving a total of just 21 million bitcoin that will ever exist.



Bitcoin proponents argue that gold is not verifiably finite — it could even be <a href="https://www.businessinsider.in/science/space/news/asteroids-contain-metals-worth-quintillions-of-dollars-but-mining-them-wont-necessarily-make-your-richer-than-bezos-or-musk/articleshow/83989878.cms" target="_blank" rel="noreferrer noopener">mined</a> from asteroids in the future — and it is less divisible, easier to counterfeit, harder to transport and easier to seize.



While we can’t be sure that humanity will be mining gold or other precious metals from asteroids in the future, it is true that bitcoin is more divisible, easier to transport, harder to seize and arguably harder to counterfeit than gold — although this is mainly due to its intangible and digital nature.



<h3 class="wp-block-heading">Bitcoin’s performance as a safe haven asset</h3>



While bitcoin has started falling, gold has increased amid the market turmoil, leading many to dismiss the narrative of bitcoin as a gold replacement and safe haven asset.



When 2022 began and reports on inflation showed record-breaking increases, bitcoin’s narrative as a safe haven asset weakened. Bitcoin fell further while gold maintained its course.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="460" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png" alt="" class="wp-image-17906" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-in-2022-1024x460.png?w=1817 1817w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>Bitcoin and gold in 2022 | Source: <a href="https://www.tradingview.com/chart/yVI20mSC/?symbol=BITFINEX%3ABTCUSD" target="_blank" rel="noreferrer noopener">TradingView</a></figcaption></figure>



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="469" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png" alt="" class="wp-image-17908" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/bitcoin-and-gold-since-sept-2021-1-1024x469.png?w=1791 1791w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>Bitcoin and gold since September 2021 | Source: <a href="https://www.tradingview.com/chart/yVI20mSC/?symbol=BITFINEX%3ABTCUSD" target="_blank" rel="noreferrer noopener">TradingView</a></figcaption></figure>



Bitcoin continued to fall as news came to light that Russia was <a href="https://cms.blockworks.co/market-wrap-s-and-p-drops-to-lowest-since-june-2021-while-crypto-extends-losses/" target="_blank" rel="noreferrer noopener">ramping up its presence</a> at Ukraine&#8217;s border. The record-breaking inflation and geopolitical tensions in Eastern Europe fit exactly into the narrative of what safe haven assets are supposed to protect against. Even though bitcoin had been touted as one of these assets, perhaps even the best of them all, it provided no protection. 



<h3 class="wp-block-heading">So why isn’t bitcoin behaving like gold?</h3>



As more investors have added bitcoin to their portfolios, the psychology around the asset seems to have shifted from a libertarian, censorship-resistant inflation hedge to a purely speculative technology play.



While it was always a speculative investment, its correlation to risker tech stocks and ETFs has become far more prominent than its correlation with safe haven assets lately.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="460" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png" alt="" class="wp-image-17909" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/BITC-and-major-tech-ETFs-in-2022-1024x460.png?w=1818 1818w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>Bitcoin and major tech ETFs in 2022 | Source: <a href="https://www.tradingview.com/chart/yVI20mSC/?symbol=BITFINEX%3ABTCUSD" target="_blank" rel="noreferrer noopener">TradingView</a></figcaption></figure>



Many outspoken bitcoin supporters still argue the cryptocurrency should provide a hedge against inflation and societal turmoil due to its qualities such as scarcity and censorship resistance. Yet, bitcoin continues to look less and less like a safe haven.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">What I simply don&#39;t understand is the fact that <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a> is dropping in these times, actually.&mdash; Michaël van de Poppe (@CryptoMichNL) <a href="https://twitter.com/CryptoMichNL/status/1496776190916546564?ref_src=twsrc%5Etfw">February 24, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Potential reasons for bitcoin’s divergence include <a href="https://cms.blockworks.co/market-recap-btc-drops-as-white-house-plans-crypto-regulation/" target="_blank" rel="noreferrer noopener">fears</a> of over-regulation and an overall lack of education about the asset class. Some <a href="https://www.cardify.ai/reports/crypto" target="_blank" rel="noreferrer noopener">reports</a> estimate that one-third of all cryptocurrency investors know little to nothing about what cryptocurrency is or how it functions. Until that changes and investors get clarity on regulations, bitcoin’s potential role as a safe-haven asset is likely to remain elusive.



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