Reading Elon Musk’s Dogecoin Plan
Summary
- Cryptocurrency has approached to the third transformation.
- Energy consumption is not only the target Elon Musk has kept his eye on, but also something else such as geopolitics. Dogecoin seems to pass the criteria.
- NFT, established meaningful digital asset to create its authenticity, has started to set in place. Native digital citizen has made an experiment on living with it.
We cannot predict ‘Goethean science’ based event that encapsulated “complex adaptive system”. The Covid-19 pandemic has spread out worldwide with different patterns in different countries. Some countries may face multiple waves, some may be not. Normally, human being is a creature to be cursed to remember only the history, therefore, he tends to judge the future with his experience. The most precise method to predict the future is to use causal model based on historical data mixing with expert interview (such as Delphi technique,) even though it will give only 70 per cent accuracy. Whether the Dogecoin and other altcoins are bubble remain to be seen. In this article, I’ll give some qualitative analysis on why Elon Musk has given his attention to Dogecoin, quantitative data will be also presented to reassure the trend.
The Backdrop
Cryptocurrency has been originated around mid 2000s on a prototyping of Digicash’s eCash by David Chaum (see GitLab,) the author of a paper “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms,” and related literature. Satoshi Nakamoto has perfected it to resolve Byzantine General Problem in late 2010s by building Bitcoin and he just disappeared mysteriously. The cryptography itself has a long history, the classic story is about a breaking of Nazi’s Enigma and the more important Lorenz Cipher by two pairs of Hut 6–Hut3 and Hut8 (led by Alan Turing)-Hut4 during World War 2, the recent digital cryptography is related to both cypherpunk and Crypto Wars in 1980s against a restriction on an exportation of cryptographic technology before it was eased in 2000. See Bitcoin forum.
Bitcoin has relied on the processor-intensive “proof of work” consensus model based on scrypt algorithm and UTXO, it has consumed enormous energy. Bitcoin has relied on multilayer transaction system. The carbon-footprint is as much energy as Norway, and is expected to consume energy equal to the entire European countries. Blackrock’s ESG scheme might be behind Musk’s move [ESG rating doesn’t dictate a survival of corporate during the Covid-19 pandemic, read an article from Gianfranco Gianfrate, Tim Kievid and Mathijs van Dijk (2021),] according to ARK founder, Cathie Wood. Moreover, as Musk has pointed out on his twitter, Bitcoin is not really “decentralized.” (conferatur traceable node) China has extensively operated Bitcoin mining more than 75 per cent, among this it has been intensively located in rural area such as Xinjiang (hashrate = 35.76 per cent), Inner Mongolia (hashrate = 8.07 per cent), and Sichuan (hashrate = 9.66 per cent), see data from Cambridge Bitcoin Electricity Consumption Index and terahashes per second. See tokenomics design and use cases of cryptocurrency. We can trace Bitcoin mining here and here, leverage on future can be traced here.
Some analysts may think that China will use Bitcoin mining as its leverage to attack digital money, Central Bank Digital Currency (CBDC) or cryptocurrency. A broader implication is which CBDC or currency will sit at the next world reserve currency. The US authority has started to debate about CBDC seriously. The competition of Govcoins arises (see Atlantic Council’s reports, lest digital SDR, new Bretton Woods or even Bretton Woods 3.0 will be a final proposal. This idea is so similar to the Chinese government’s holding US treasury Bond on its intention to use as leverage. But this is not the case. China’s miners have just acted as another outsourcing model in the upstream in the whole cryptocurrency ecosystem. Chinese economy and Western economy are difficult to decouple. The Chinese can’t simply bear the loss, so do the US and Western downstream economy can’t afford high carbon footprint as produced in China. The impact of a measurement announced by Beijing to curb cryptocurrency trading and mining, flexible and adjustable, remains to be seen, see the recent assessment here.
China has its own “digital Yuan” project aiming to replace M0, based on either Ethereum or Libra’s Diem, rebuild alternative trade settlement system apart of SWIFT and for KYC/CFT/AML. This kind of regulatory measure in China is, however, not the first time. Please note that China’s Yuan has been manipulated, “Treasury said that the bilateral imbalances were in part caused by China’s distortive economic and trade policies, which limit foreign investment and imports.” According to Time, “In China’s impoverished central province of Ningxia, for example, subsidized power supplies designated for locals to process Goji berries as part of poverty alleviation efforts have been covertly syphoned off for bitcoin mining” (sig).
In El Salvador, Bitcoin has been a legal tender, yet there are protests against it and 77% of its population reject the idea, “most of the country’s remittance recipients and merchants would prefer to handle dollars rather than Bitcoin.”
A proposal from Facebook on Libra might be a possible reason to dive down the Bitcoin’s crash on 2018.
The downside risk is at the psychological panic short selling whenever the coming quantum computing, especially in quantum cryptocurrency mining, to break traditional cryptography used in any cryptocurrency becomes true. The recent fluctuating of cryptocurrency from various news is evident.
The Threshold
While Vitalik Buterin has introduced Ethereum, it has also come with a concept of “Lego of cryptofinance,” the Decentalized Autonomous Organization — DAO (see possible governance discussion,) which will allow a possibility of Decentralized Finance (DeFi). There is currently around USD 50–60 billion total value locked in DeFi. The DeFi will permit financial transaction automatically without any intermediary whether we will engage in getting loan, mortgage, investment, interest yield, decentralized exchange, trading real world stock in mirror or any other transaction (a kind of synthetix,) albeit smart contracts auditor is needed. With this concept, if mature, it will disrupt the whole physical banking system, the regulator in the UK has started to strike back. Charles Hoskinson, the former co-founder of Ethereum, has created a rival, Cardano. It has sent Cardano’s ADA in the top five cryptocurrency in term of market value after Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and Binance coin (BNB).
Bitcoin itself may have Defi upgraded features via Taproot trigger.
Although Dogecoin (DOGE) sits at the sixth top currency, followed by Ripple (XRP) — an alternative in Cross-border money remittance industry from SWIFT (noted that Ripple has fought with SEC over personal financial information subpoenas and it used USD 690,000 to lobby in activities such as Token Taxonomy Act and the Digital Commodity Exchange Act,) it is impressive that the Dogecoin can still hold its value after the big declining, compared to Bitcoin (the first generation cryptocurrency, still heavily relates to the underground or shadow economy,) Ethereum and Cardano (the second generation cryptocurrency), and Tether as a standard stable coin to peg its value with the US dollar. Ethereum was among the first major ICO, premine, in 2014 with USD 18 million in BTC.
I have retrieved trading transactions in US Dollar term of Ethereum (ETHUSDT, green line), Dogecoin (DOGEUSDT, orange line), Cardano (ADAUSDT, blue line) and Bitcoin (BTCUSDT, gray line) for the last 30 days trading transaction from Binance. From a quick glance, according to the performance, we can see that Bitcoin has been damaged the most, Ethereum and Cardano can still be acknowledge the gains, while Dogecoin seems to reap the profit better than the others.
And if we’ve examined the three altcoins in term of Bitcoin, it will confirm this trend. However, we will notice that Cardano seems to exceed either Dogecoin or Ethereum, but not stake, see pooltool vs etherscan.
The above figure will be in line with the returns in different period from our seven sets of cryptocurrencies exchange as follow:
From above table, in column#1, if we hold Bitcoin from the last 30 days we will lost at 28.29 per cent, and will lost at 19.74 per cent if we hold it for 5 days. There is no any period in 30 days to gain a profit if we long Bitcoin. In column#2, Ethereum can generate a profit at 1.38 per cent if we long it for 30 days. In column#3, Cardano’s profit will be replaced with loss if we long it less than 15 days. While in column#4, Dogecoin seems to follow Cardano, safe that its loss in term of US Dollar is much more than Cardano.
But if we observe the remaining three column of the trading of altcoins in term of Bitcoin, Ethereum (ETHBTC) and Cardano (ADABTC) seem to move in the similar direction. While Dogecoin (DOGEBTC) can perform better than both Etereum and Cardano, albeit it can generate much more profit if we long Dogecoin more than 20 days. This seems to be in line with price manipulation according to Musk’s tweets. Please note that Dogecoin is the second most social engagement cryptocurrency after Bitcoin. The meme power of Dogecoin (together with an example of Gamestop’s short squeeze) might be happened from its icon, Shiba Inu’s connection to Japanese pop culture spreading in America. It might be the same effect that Ghost of Tsushima, connected to deep geopolitics and ancient martial art — Tenshinsho Jigen Ryu Hyōhō (天眞正自源流兵法,) could strike as much as 6.5 million copies as of March 2021.
As mentioned earlier, because of ability to use as fundamental token in DeFi, Ethereum and Cardano seem to isolate themselves from Bitcoin. But Cardano has weighted its balance between business development and technological development more than Ethereum. Cardano could secure its funding from initial coin offering (ICO) with the opening market cap at USD 600 million. It has used different protocol from both Bitcoin and Ethereum as proof-of-stake protocol called Ouroboros. While Bitcoin core developer can’t make agreement to improve into proof-of-stake, Ethereum has announce its changing to proof-of-stake in the coming months even though spending six months transitioning due to problem related to people rather than technical problem, therefore tremendous cutting energy consumption. It has a well design governance. It has pioneered to build a digital infrastructure for coffee’s supply chain smart contracts via SMART Africa. Its founding code is Haskell, see Cardano’s Plutus smart contract. It has a neat engineering research partner, IOHK. The recent Alonzo’s hard fork testnet under Goguen is underway. Dfinity’s smart contracts project is also interesting.
It’s impossible that Musk won’t take into the account other factors I’ve mentioned earlier. He has measured its potential since 2019, with its helps improving scalability and it has passed his criteria. Cardano seems to pave the beauty roadmap, and Dogecoin is even much more popular than Ethereum and is ready to go to the next level.
The Third Transformation
Now, the cryptocurrencies have demonstrated their next disruptive power lies in non-fungible token (NFT), prepared by either Ethereum or Cardano. NFT is the next big thing after DeFi, both are parts of decentralized applications (dapps).
Most economists have been well acknowledge some standard feature with “digital assets”, expensive and difficult to make an investment to produce the first product, but it has “near zero marginal cost” to reproduce other copies. In physical assets, we can identify some anomaly in each copy, albeit how small it is. But we can’t do so with digital asset, each copy is total identical. We can’t distinguish originality from the reproduced entities. NFT is, however, enable us to establish originality in any digital asset. Technically, we’re imposing “digital twin” with NFT, so does “internet identity”. In other words, even though memes continue to evolve and spread, until it reaches “normie” status as appeared on Ellen, but NFT “tangiblizes” an outstanding successful meme to authenticate out of the mundane primordial soup of human culture and render it with either vector of transmission via language, icon, photo or social media, and etc.
Musk has almost sold NFT’s song; NyanCat had been sold for USD 600,000; Jack Dorsey sold his tweet at USD 2.9 million; Vignesh Sundaresan, a Singapore-based blockchain entrepreneur with his pseudonym “Metakovan,” has bought a digital artwork “Everydays: The First 5000 Days” from the American artist Beeple at Christie’s with value as much as USD 69.3 million in early March this year. He’s owned his most assets in digital world, and he intends to display this artwork in digital museum at Metaverse (see this article and a nine-part piece). Whale Shark is among the top investor as much as 210,000 NFTs according to independent audits from Nonfungible.com.
Apart of these anecdotes, Nonfungible.com has published its Q1 quarterly report stating that NFT trading performance on Q1 is at USD 2,020,942,331 up 13,118 per cent Y-o-Y or 2,053 per cent Q-o-Q. Market distribution is led by both Collectible (48 per cent) and Art (43 per cent).
It is difficult to comprehend why the younger generation such as “Metakovan” has trusted and made his investment wholeheartedly in digital assets. This young generation won’t waste their time to theorizing the phenomenon. They’ve soaked their life into digital world making money, exchanging their view via discord, and experiment with it as native digital citizen, while the older generation thinkers are trying to bridging their paradigm with “post-modern” concept witness a disrupted physical world.
Musk has mentioned Dogecoin’s motto, “to the moon”. To completely resolve a problem of carbon footprint in cyptocurrencies, he might think about mining cryptocurrencies in the orbit. This is feasible, since it doesn’t take more cost on payload to bring hashrate back on earth, but communication satellite. In the short run, to fix energy consumption with algorithm is not a bad idea. The explosion of 5G networks and IoT with NFT will help distinguish meaningful “data” to be useful in data analytics. If we equip the next generation cryptocurrency with quantum resistance, it would be perfect.
Conclusion
The instrument to hedging risk and profit in cryptocurrency, according to the mainstreet, is still restricted if not slowly to adopt, “the Office of the Comptroller of the Currency (OCC) gave the banks it regulates the green light to hold cryptocurrency for clients, U.S. Bank, Bank of New York Mellon and Citibank took steps to offer crypto services”. The White House has started to examine “the gaps” on regulatory issue such as money laundering, tax evasion (handled by treasury) and investor protection (handled by SEC, i.e. Bitconnect case,) if not they are still in the “wait-and-see” posture, “They’re aware of the fact that there are all kinds of risks in the abstract and things to look out for, but they are still largely in a wait-and-see posture”. Majority has perceived Bitcoin as cryptocurrency representative (see Bitcoin dominance ratio,) while stablecoin such as Tether has acted as a real intermediary.
In term of cryptocurrency, a new kind of investment grade asset class, I would recommend to short Bitcoin (BTC-USD) against a current environmental concerns, but we can’t diversify our portfolio to long with different altcoins easily, as of our discuss earlier on both Ethereum (ETH-USD) and Cardano hence there is a small room to exploit an arbitrage especially among Doge-BTC-USDT, albeit the upside is unlimited. Dogecoin (DOGE-USD) has a promising future, but without an unveiling of a robust Musk’s commitment and plan over Dogecoin developer community given that 7 per cent of USD 6 billion reported in Q2/2020 of Tesla has come from sales of environmental regulatory credits, it should be neutral. Musk himself announced in the B World that he holds Bitcoin, Ethereum and Dogecoin, “I own Bitcoin, Tesla owns Bitcoin, SpaceX owns Bitcoin, I personally own a bit of Ethereum, and I hold Dogecoin of course.” [Grayscale has announce a loss of USD 2.1 billion within 24 hours in its current USD 34.1 billion Assets Under Management (AUM). Note that asset management is a problem of approximate optimization. (updated) Grayscale has announce to hold ADA as the third digital asset after Bitcoin and Ethereum in its Digital Large Cap Fund (GDLC).] Dogecoin’s transaction cost on mainnet (currently at 2.73 Doge) might generate some concerns on replacing fiat with cryptocurrency for daily-life expenditure. Dogecoin, aiming for micropayments, has a supply cap of 10,000 coins per minute which in turn it will generate 4 per cent yearly inflation, but in the long run, the inflation rate will decline into 2 per cent, c.f. stock-to-flow of Bitcoin and Bitcoin’s inflation rate (see S2FX and Rainbow chart.)
Both Dogecoin and XRP haven’t been included in S&P Cryptocurrency Broad Digital Market (BDM) Index. The index itself comprises of 243 cryptocurrencies, those must be trading with a market capitalization ranges from USD 10 million, according to its methodology paper. One reason that Dogecoin has been ignored is that it lacks of a white paper.
The payment wallet address might be identified via unstoppable domains.
Canada permanently left the gold standard in 1929; Britain and Germany in 1931; the United States in 1933; France in 1936. If the gold standard was so successful, why did it not last? Why did countries replace their gold backed currencies with fiat currencies in the 1930s?
Warren E Weber has summarized in his paper that similar to gold standard, in the world of Bitcoin standard the regime might not be sustained due to the pressure policymakers in each country will be faced during possible financial crises, according to the quantity theory of money. Bitcoin may still continue to be, like gold (albeit gold is manipulated by short sell, see global central banks gold reserve,) a stored value medium. Current total market value of cryptocurrency at USD 1.7 trillion is too small for the Fed to consider it as a serious threat or competitor, albeit posting some financial risk to the system. Although, currently Fed has hold around USD 42 billion foreign currency, USD 33 billion reserve position at IMF, USD 52 billion SDRs and 11 billion gold stock, there is no idea to add Bitcoin into the list, lest forfeiture such as from operation Onymous to suppress digital crime at Darknet by FinCEN. See U.S. President’s Working Group to discuss stablecoins.
In the long run, although not yet considered a safe-haven asset neither to be considered as alternative investment asset (TIPS might not protect hyperinflation,) a rising of cryptocurrency market value is expected since a growth in money supply either by channeling deficits and debt in fiscal policy, negative interest rate and also quantitative easing especially after the Covid-19 (this actually will limit monetary and fiscal instrument to tackle with the future economic crises,) it will pass this policy moral hazardous mismanagement (to compensate debt-driven growth and to institute economic stimulus) of trust that back the US Dollar not at CPI (thanks to Chinese lower production cost as mentioned by PBOC’s Guo Shuqing) but other assets to leverage against “temporary” deflation either in general or crash (declining of commodity price) made possible by (1) commodity prices / poverty rate (albeit this is debatable in some supply chain,) (2) technological innovation (AI training cost is 68% declining annually or on the other hand, doubling its efficiency every 16 months,) (3) registered companies’ buying back their own equity and (4) an ageing population, however most important factor currently is Covid-19 pandemic that slows down economic activity and please note that long-term inflation rate (reflected by long-term bond yield) has converged to FOMC’s inflation targeting at 2 per cent over time; and also hedging against “future inflation” if not getting stuck in liquidity trap shown in problem of jobs number (because of an increasing of money supply,) “The data shown illustrate that the hypothesis is correct and that the expansionary monetary policy of central banks is being channeled into financial markets, allowing governments to finance themselves at low interest rates. Mistrust of fiat currencies is, moreover, one of the causes of the increase in the price of some cryptocurrencies and gold.” This may create another cycle between Dollar carry trade and unwind, see Dollar index, Fed’s measurement and economic discussion in Bitcointalk. Russian National Wealth Fund (NWF) has sold all US Dollar, “holdings of the U.S. dollar were reduced from 35% to zero. The wealth fund also cut its share of British pounds to 5%.” US treasury bond’s real yield is actually negative.
Currently, lower long-term bond yield (or flatten yield curve) may suggest that the market has expected future low inflation (or deflation and FOMC’s designated low interest rate, equity might continue to rise, this might contradict FED’s expectation to rise interest rate due to higher inflation which is 4.2 per cent on April and 5.0 per cent on May, a rising of freight shipping index might be another cause of inflation hike, albeit a manipulation of crude oil production volume to increase price from OPEC, again this depends on Post-Covid-19 recovery strategy — see 700 years of interest rate and an inflation rate after the Spanish influenza 1918–1920):
Central banks do not control long-term interest rates. Market forces (supply and demand) determine equilibrium pricing for long-term bonds, which set long-term interest rates. If the bond market believes that the FOMC has set the fed funds rate too low, expectations of future inflation increase, which means long-term interest rates increase relative to short-term interest rates — the yield curve steepens. If the market believes that the FOMC has set the fed funds rate too high, the opposite happens, and long-term interest rates decrease relative to short-term interest rates — the yield curve flattens.
According to Michael J. Boskin, “Historically, huge debt buildups have usually been followed by serious problems: sluggish growth, an uptick in inflation, a financial crisis, or all of them.”
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
