🧘♂️It's Actually Happening
Market Meditations | July 13, 2021
Here’s everything you should know about it.
? It’s finally here. Today, we discuss the Ethereum EIP-1559 upgrade and what it means for crypto traders and investors.
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⏰ In A Rush?
Here’s 5 things you need to know about the crypto markets today:
? Bitcoin Drops as Traders Await June CPI Inflation Report
Bitcoin was lower Monday, falling along with most digital assets, as traders awaited a key U.S. inflation report due out today.
✅ Goldman Sachs Calls Coinbase a ‘Tactical Trade’
Citing its brokerage analyst’s “buy” rating for COIN, researchers on the investment bank’s derivatives team said in the client note that the recent parade of negative crypto headlines could – paradoxically – help lead to an earnings beat for Coinbase.
? Gemini Plans to Beat Binance Through Compliance
The recent regulatory backlash against Binance could give a competitive advantage to regulated exchanges.
? Venture Capital Makes a Record $17 Billion Bet on Crypto World
But for a more stable measure of the industry’s growth, consider this: venture capital funds have already poured $17 billion this year into companies that operate in the space, according to data provider PitchBook.
? Satoshi Era Bitcoin Wallet Activated
Popular crypto tracking Twitter bot Whale Alert has detected and activated a Bitcoin wallet that has been dormant for over nine years. It contains 791 BTC, which is the equivalent of $26,147,621 in fiat at today’s price of the flagship cryptocurrency.
? It’s Finally Here… EIP-1559
1️⃣ What is EIP-1559?
For years, it seemed that mainstream media would jump at every chance to give cryptocurrency the cold shoulder. It’s a scam, they said. It’s for criminals, they said. Eager developers continued building meaningful projects whilst traders and investors like you stuck around. Even if you are new to space, you still had the conviction to look past the media’s perfunctory analysis of the space and do your own research. Now tides have turned and articles published by the media focus more on Bitcoin as “digital gold” and DeFi as “revolutionary.” One story that’s made its rounds recently is that of Ethereum Improvement Proposal 1559 (EIP 1559) and the concept of Ultra Sound Money. Let’s take a look at what all of this means, how to interpret it, and the implication for crypto traders and investors.
EIP-1559 is part of the London Hard Fork and will officially launch on mainnet activation at block 12,965,000.
In simple English, this means the changes EIP-1559 brings will go into effect on the main network on 4 August.
It is already live on a testing network named Ropsten that runs the same protocol as Ethereum and is used to work out any bugs before the upgrade is deployed on the main network.
⚠️ So what upgrades does EIP-1559 bring exactly?
EIP-1559 will change Ethereum’s fee structure. Currently, Ethereum uses a traditional auction mechanism whereby everyone submits a price at random that they’re willing to pay a miner to process their transaction. Generally, miners will process transactions from people who have paid the highest fees.
Because nobody has a baseline for what others have paid, this system causes some people to overpay for transactions. By switching to EIP-1559, the industry has suggested that users could save over 90% in transaction fees because they will no longer have to estimate a transaction fee. Instead, users pay a predetermined base fee (the price of which will vary according to network congestion).
Anyone who wants a miner to process their transaction faster can add a separate tip on top of the base fee.
? Let’s take a non-crypto example to clarify the base fee + tip mechanism. You’re at a pizza shop where each slice is $3.50. $3.50 is the base fee for anyone who wants a slice of pizza. You’re starving but the shop has a huge line that will take 45 minutes to get through. What if the shop introduced a Pizza Improvement Proposal (PIP-1559) where you could tip the chef any amount in addition to the $3.50 cost of the slice in order to make your pizza faster. The higher the tip relative to others in line, the faster you get your slice as the chef will be incentivized to cook your pizza over others not offering a tip. This is the same process with transactions under the EIP-1559 upgrade. Users pay a base fee and have the option to add on a tip if they’d like miners to process their transaction faster.
2️⃣ What Does EIP-1559 Mean for Crypto Traders and Investors?
Under the current auction system, the transaction fee you pay to have your transaction processed goes entirely to the miner. Under EIP-1559, however, the base fee is burned, meaning that the amount of Ether paid as the base fee is removed from circulating supply. Ether paid as a tip goes to the miner. If you’d like to see how much Ether is burned on the Ropsten test network in real time, you can do so here.
✅ Why does this burning mechanism matter for crypto traders and investors?
This is where the infamous Ultra Sound Money phrase comes into play whereby EIP-1559 is said to make Ether deflationary by burning more Ether than is issued into supply annually.
In fact, according to this document put together by Ethereum 2.0 researcher Justin Drake, an estimated 1000 ETH will be issued and 6000 ETH burned daily, reducing annual supply by around 1.4%.
Analysts have compared the reduction in Ether supply with EIP-1559 to rival that of the Bitcoin supply reduced in 3 halvings.
At the same time, we see that the fees generated by Ethereum are at an all time high of $6M+ and supply of Ether held on exchanges continues to hit all time low after all time low. From this information, the argument can be made that demand for Ethereum is increasing rapidly whilst a mechanism to significantly reduce supply looms overhead. Mathematically, higher demand with lower supply leads to price appreciation. That being said, it’s important to remember that the EIP-1559 upgrade does NOT mean the price of Ether has to increase as fundamentals and price are often not correlated, especially in the short term. To illustrate this point, remember that the EIP-1559 upgrade was just as strong fundamentally when ETH traded above $4k, but the price has still since crashed.
3️⃣ Putting It Altogether
News like this is a good reminder that whilst cryptocurrency as an industry is maturing and the data shows real adoption, price may not necessarily reflect this. When trading or investing, It’s critical to have a complete Risk Management plan in place. Make sure to check out our FREE guides on Portfolio Management and Fundamental Analysis to put together a system that aligns with your risk tolerance, time horizon, and financial goals in order to profit and build wealth.
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? What a Gem!
A 101.38 carat diamond auctioned at Art and Jewelry brokerage Sotheby’s has just been bought using cryptocurrencies. But how much did the winner pay?
? We will be sharing this guide as a newsletter tomorrow.
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1. $12.3 million
$12.3 million is the most expensive gem to ever be purchased with cryptocurrency, according to MarketWatch. Whispers of this auction began appearing in late June, when it was made clear that crypto could be used to purchase items. Even the name of the diamond pays homage to crypto keys – which are used to unlock a person’s crypto holdings – by being called “The Key 10138”.
The winner of the diamond has also purchased anonymously, and the details of which cryptocurrency he used are still unknown. This is a fitting choice as even the maker of Bitcoin him or herself has chosen to remain anonymous.
Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.
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