Here’s How Bitcoin Gets to $50,000

Plus: the crypto companies turning away business

What may prove to be the crypto news of the year broke this week, with the long-rumored announcement by PayPal that support for buying, selling, hodling, and purchasing will soon make its way to the company’s customers. Filecoin continues forward with its long-awaited mainnet as several of its top miners object to the economic model.

Fed Chair Powell continues to ponder a digital dollar. We also have the state of crypto in 2020, according to Digital Currency Group. There’s news about how Bitcoin adoption benefits the ongoing protests in Nigeria, regulatory roundups, overwhelming requests for DeFi audits, and more.

On Unchained, two members of a DOJ strike force focused on cryptocurrency criminals describe how they prosecuted some of the biggest cases involving Al Qaeda, ISIS, Hamas, North Korea, the creators of the largest online child porn site and more. And on Unconfirmed, on-chain Bitcoin analyst Willy Woo describes the changes he’s seeing in the Bitcoin markets, and explains what it will take to get to a $50,000 Bitcoin.

This Week’s Crypto News…

PayPal announced Wednesday that it would add support for Bitcoin and other cryptocurrencies in the first half of 2021. The company plans to let its 346 million customers purchase and store the virtual currencies in its online wallet and use bitcoin, ether, litecoin and bitcoin cash for purchases at its 26 million merchants. PayPal also plans to expand support for Bitcoin and other cryptocurrencies to Venmo in the first half of 2021.

For the time being, PayPal will not give users access to private keys or the ability to transfer their crypto to other accounts on or off the platform. This decision was met with expected criticism from the crypto community. However, Cinneamhain Ventures partner Adam Cochran speculates that PayPal chose to do this because “right now they want to profit on spread and need to get robust AML in place for transfers.” My personal guess is that they also need to get the proper fraud protections in place so they don’t get eaten alive by fraudsters stealing bitcoins from their platform. 

The Block’s Ryan Todd notes that PayPal operates in many jurisdictions that are not crypto-friendly, and so this move could force tax regulators to consider de minimus tax exemptions for paying with crypto. Reading between the lines of the investor relations release, in which the company mentions working with central banks and exploring other use cases, Todd also speculates that this is the first step of a larger plan to expand into central bank digital currencies and stablecoins.

After the PayPal news, the price of Bitcoin saw a substantial rebound to $13,000 as of press time. On CNBC Thursday morning, billionaire hedge fund manager Paul Tudor Jones, who made news earlier this year when he invested in bitcoin, compared investing in BTC to putting early money behind tech companies like Apple or Google. He said, “Bitcoin has this enormous contingent of really, really smart and sophisticated people who really believe in it. … I’ve never had an inflation hedge where you have a kicker but you also have great intellectual capital behind it. … When you short the bond market — that’s your inflation hedge — you’re really betting on the fallacy of mankind rather than its ingenuity and entrepreneurialism. So I like bitcoin even more now than I did then.” 

Several major Filceoin miners have halted or reduced their mining power since the network’s mainnet launch last week. The blame for the slowdown is Filecoin’s current economic incentive model, which many miners feel is not in their favor because it does not give block rewards to miners immediately but instead vests over 180 days. Most of the top ten miner IDs have significantly reduced the amount of storage power they contributed during the testnet. 

A major Filecoin miner, Li Bai, rejected the idea that the reduced mining power was an organized, collective strike, saying, “It’s not a strike. It’s just a better strategy, given the current economics. With more potential sell pressure when there’s no adequate circulating $FIL at a steady price range, it’s not lucrative to pledge a spot $FIL for a future $FIL whose price could be lower.” 

In a Twitter thread Monday, Protocol Labs founder and CEO Juan Benet called the miner strike “nonsense.” He said, “in last 2 weeks, *we* the devs recommended to many miners to slow down growth rate to match their token flow, or pause until they can afford to grow steadily.” He continued, “there are many people hoping to get rich quick with filecoin without contributing value to the network — that’s just not how it works. This isn’t what the protocol rewards. … we already have huge capacity, and don’t need much more yet. The network must now focus on making that capacity useful, by storing valuable data for users.”

Federal Reserve Chairman Jerome Powell said during a panel discussion hosted by the International Monetary Fund on Monday that the U.S. continues to evaluate central bank digital currencies. Powell said a CBDC might improve the broader payment system in the U.S. and reiterated that the Fed has made no decision on a central bank digital currency at this time. He said, “I think it’s more important for the United States to get it right than it is to be first.” 

Regulatory Roundup

• A proposed judgment between Kik and the Securities and Exchange Commission would see Kik paying a $5 million fine over its 2017 token sale, as well as giving the SEC 45 days’ notice on any Kin token transactions over the next three years.
• The Financial Crimes Enforcement Network fined Helix and Coin Ninja founder Larry Dean Harmon $60 million for violations of the Bank Secrecy Act due to his operation of what they call virtual currency “mixers.”
• Coinbase published a transparency report of government requests that showed 97% were regarding criminal activity, with the vast majority from US regulators. Of those, the FBI made up 30% of those inquiries, Homeland Security Investigations comprised 17% and state and local regulators accounted for 16%.

Digital Currency Group’s annual State of Crypto report, which polled the founders and CEOs of its 150 portfolio companies, paints a picture of an outperforming industry amidst the COVID-19 pandemic and resulting economic shockwaves. 2020 has seen Bitcoin volatility nearing all-time lows in the last half of the year as signs of a global economic slowdown have exacerbated local currency devaluation fears in emerging markets.

While one in five executives pointed to remote work and operational interruptions due to COVID as a primary challenge faced in 2020, one in four also felt that a global recession would have the greatest impact on digital currency adoption. As for the greatest risk to the industry, 51% cited compliance and regulation as an impediment to sustainable growth. 

Respondents named the rise of DeFi as the most bullish development of 2020. Those interviewed seemed unconcerned with the ebbs and flows of token prices, noting overall protocol development and business growth bode well for the industry’s future. They also contrasted the DeFi surge with the ICO bubble of 2017, saying that talent and professionalism are more productive and ethical than before. As for whether Ethereum would remain the chain of choice for DeFi, response was split, with 51% of respondents saying yes and the rest saying “unsure” or “no.”

Given the numerous exploits in unaudited DeFi contracts so far this year, it’s perhaps no surprise that audit firms have been swamped with requests from DeFi projects. The demand has been strong despite a swift pullback in the DeFi markets, with most tokens falling 19% in the last month. Firms such as OpenZeppelin have said they have booked clients well into 2021, with “governance token clones of varying quality” making up much of the requests. Audit firm Quantstamp, which disclosure, has been a sponsor of my shows, said that it is “rejecting lots of projects.” 

Protesters in Nigeria are calling for the disbandment of the special anti-robbery squad, aka SARS, accused of illegal murder, extortion, and torture of innocent civilians. And how are they funding their protests? Bitcoin. The Feminist Coalition, a Nigerian activist group that had initially started raising funds in multiple fiat currencies, found its bank accounts frozen within days and soon asked donors to divert their funds to Bitcoin wallets. By October 18, the coalition had raised more than 7.2 bitcoin, or $82,000, which accounts for 44% of the total funds raised so far. Likewise, Bundle CEO Yele Bademosi announced that the firm had set up crypto wallets to help raise funds globally in support of the protesters. Within a few days, the message had begun to spread, with Twitter CEO Jack Dorsey tweeting his support for the effort, among others. 

Bitcoin’s use in this case highlights the broader adoption of crypto by a predominantly young, tech-savvy population of Nigerians. Crypto adoption in Nigeria has grown tremendously in the last year as citizens grapple with an inflationary local currency and a growing diaspora looking to send remittances home. Chainalysis ranked Nigeria eighth in its 2019-2020 global adoption index. The country also ranked first among African countries in peer-to-peer payments, moving $139 million in the last year, as Nigeria’s federal government makes plans to clear the way for blockchain adoption. 

My former colleague Alex Konrad at Forbes had a great feature out this week about Paradigm, the crypto VC firm founded by Matt Huang previously of Sequoia Capital and Fred Ehrsam, the cofounder of Coinbase. It details how they got marquee institutional investors like the Harvard and Stanford endowments to give them $750 million — and Huang and Ehrsam put it all into cryptocurrencies, mostly Bitcoin, when the bubble had truly deflated in 2018. As Konrad reports, “Bitcoin has tripled in value since Paradigm’s investment, meaning aside from any other bets it’s made, Paradigm’s starting bankroll is already worth 3x.” 😮

In response to the PayPal news this week, Charlie Shrem tweeted a photo of him, Charlie Shrem and Roger Ver at Money 2020 in 2012 for their then-company BitInstant. Charlie said, “We told them we wanted the best booth we could afford, but we needed to be next to the @PayPal booth so we can show the world OUR financial system!” ShapeShift CEO Erik Vorhees’s retweeted the photo, and commented, “I distinctly remember the PayPal folks snickering at us 😏” 

I distinctly remember the PayPal folks snickering at us 😏 https://t.co/hKGj1qHDJz

— Erik Voorhees (@ErikVoorhees) October 21, 2020