Monthly Investment Thoughts On Digital Assets > Bitcoin

COVERED TOPICS

1. TAPROOT
2. YIELDS

  • IMPERMANENT LOSS

3. FORECAST
2. NEW AT DAIM

Taproot

If you’re looking for something to be thankful for this November look no further than the biggest Bitcoin upgrade in 4 years, Taproot. The core ideas have been kicked around for the past few years, however consensus to update the protocol was not reached until June with implementation coming in mid-November, at a block height of 709632 to be exact. The upgrades are another step in improving the privacy and scalability of Bitcoin while also facilitating smart contract functionality that many feel is its biggest drawback.

Without getting too technical, the driving force of the improvement in the protocol is the move to Schnorr signatures. The current signature algorithm, Elliptic Curve Digital Signature Algorithm (ECDSA), has limitations for multi-signature transactions. In essence any transaction that includes more than one sender and one receiver will look the same as the one-to-one transaction. This benefit is twofold. First these types of transactions will be indistinguishable from the simpler types, which adds a degree of anonymity and therefore privacy to certain transactions on the blockchain.

Second, by making more complex transactions look like simpler ones, Schnorr signatures create a condensed output that is less data intensive. By using less data, the network can process more transactions which can lower fees and improve overall scalability.

Finally, if multisig transactions become much less data intensive, it frees up space that can be used for smart contract implementation. Soon proponents of the smart-contract du jour token that is coming to kill Bitcoin may need a new excuse.

From an investing standpoint, we view Taproot as a bullish signal that may not be fully priced in yet. While the added privacy will raise eyebrows among regulators and can create selling pressure, the improvements overall are a testament to Bitcoin’s utility, and ability to adapt which will only increase Bitcoin’s value proposition and attractiveness as an investment.

Yields

Centralized exchanges like BlockFi and Gemini have recently put out rate changes. BTC was reduced because more holders are staying long and more people are becoming comfortable with programs like Gemini’s EARN. ETH remained the same. But GUSD increased showing how stable dollars are still in demand for different investing strategies. One of our clients shared a great link that explains what many may think are outlandish yields on decentralized platforms. We do not approve decentralized yield platforms, this is just for educational purposes. More can be found in this post – Here

  • Impermanent loss
    • More advanced investors are posting digital asset pairs on decentralized exchanges to get higher yields by providing liquidity. These positions need maintenance as they are based on the total USD value posted and as the price of the underlying digital assets move either up or down, rebalancing the position is required in order to exit the yield program with the same amount of units put in. Specifically when one of the assets in the pair moves more relative to the other token that was pooled. Thus when exiting the liquidity pool you will be offered less units of the token that increased more in dollar value terms. You still get your total USD back but less units of the one asset, therefore you didn’t participate in the price appreciation. 
      • We do not approve of being a liquidity provider, this is just for educational purposes. More can be found in this video – Here

Forecast

Our beginning of the year price target of $90k Bitcoin by the end of 2021 is still in play.  Here is how we see the rest of the year setting up to get there. In the second half of September the news headlines will start to align with the promotion Taproot, giving BTC a push into all time highs. Then the Fed is due to publish their research on a possible (very likely) US Central Bank Digital Currency. This report will further reinforce the government’s acceptance of blockchain technologies thus boosting the value of digital assets. We see a growing chance that Biden will be forced to change his stance and implement shutdowns. This will likely lead to a macro sell-off, which will include digital assets, unless he matches the order with stimulus. Here is a great dashboard for live data on Bitcoin – Here

New at DAIM

We are proud to announce a new member of the team, Mike Soroudi. He comes from a traditional asset manager that had over 2000 clients and over $2b in AUM. Mike has a BS in Economics and Mathematics from USC, holds the series 65 license, and was awarded the CFA charter in 2015. He brings a wealth of digital asset experience that began back in November 2016.

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