Speaker 1: Hello everyone, and welcome to the latest episode from the
Speaker 1: midweek edition of the coin bureau podcast. My name is Guy,
Speaker 1: and every week I pick out two of my favorite
Speaker 1: videos from coin bureaus YouTube channel to present to you
Speaker 1: in podcast form. The audio you're about to hear is
Speaker 1: from those videos I've chosen this week. Many of you
Speaker 1: have been in touch to ask whether it's possible to
Speaker 1: listen to our videos in podcast format, and so your
Speaker 1: wish is my command. This week, I've selected our videos
Speaker 1: on the efforts by a number of governments to restrict
Speaker 1: retail traders access to cryptocurrency and Ethereum's upcoming merge event,
Speaker 1: which is scheduled from mid September. In the first part
Speaker 1: of today's episode, we look at how nothing seems to
Speaker 1: irk the rich and powerful more than when the ordinary
Speaker 1: person in the street is able to speculate on high
Speaker 1: risk and high reward assets. Now, you may already be
Speaker 1: familiar with the term accredited investor. If you're not, it
Speaker 1: basically means someone rich in the US and elsewhere. Only
Speaker 1: these rich accredited investor types are able to buy stocks
Speaker 1: before they list on the open market, or invest in
Speaker 1: companies at the early stages of their development. This is
Speaker 1: how they're able to bank serious returns on those investments
Speaker 1: further down the line. This is all done in the
Speaker 1: name of investor protection, but it really just helps the
Speaker 1: rich stay that way while the rest of us fight
Speaker 1: for the scraps of what's left. This is the way
Speaker 1: things have been since the Great Depression of the nineteen thirties. However,
Speaker 1: retail investors have recently begun fighting back, and nowhere was
Speaker 1: this better scene than with the game Stop Saga in
Speaker 1: early one. Here, a coordinated group of investors banded together
Speaker 1: on Reddit to pump the stock price of an ailing
Speaker 1: video game retailer. The resulting price surge left many hedge
Speaker 1: funds which had shorted the stock severely out of pocket,
Speaker 1: and many rich and powerful people disconcerted. Moves were quickly
Speaker 1: made to prevent such a thing happening again. And now
Speaker 1: the site of lawmakers are being turned on cryptocurrency, which
Speaker 1: is perhaps the very definition of high risk and high reward.
Speaker 1: Countries from Canada to China and now starting to limit
Speaker 1: how much crypto ordinary folks can buy, and many others
Speaker 1: are taking notes. Then in the second part of today's episode,
Speaker 1: you'll hear all the latest about Ethereum's upcoming transition from
Speaker 1: proof of work to proof of steak, one of the
Speaker 1: most significant events in the whole history of cryptocurrency, and
Speaker 1: one that has been a long time coming. The implications
Speaker 1: of this switch are huge for Ethereum and indeed the
Speaker 1: whole crypto industry, and after many delays, it's almost upon us.
Speaker 1: I'll explain exactly where we are in terms of what
Speaker 1: is supposed to happen, what it all means, and what
Speaker 1: to look out for as the big day approaches. I
Speaker 1: hope you enjoy listening to these two pieces, and I'll
Speaker 1: be back talking crypto with Mad Mike very soon, so
Speaker 1: be sure to stay tuned, and if you want even
Speaker 1: more content from coin Bureau, be sure to subscribe to
Speaker 1: our YouTube channel and visit us on social media too. Recently,
Speaker 1: the Ontario Securities and Exchange Commission set an annual limit
Speaker 1: on how much regular Canadians living in the province can
Speaker 1: invest in alt coins. Although this annual limit is not
Speaker 1: a federal law, it is part of a growing trend
Speaker 1: to restrict retail investors from cryptocurrency, both in Canada and elsewhere. Today,
Speaker 1: I'm going to tell you why so many countries are
Speaker 1: starting to make it difficult for retail investors to access cryptocurrency,
Speaker 1: and what effects this could have on the crypto market. Now,
Speaker 1: I want to start by taking you back in time
Speaker 1: to the nine twenties. It's after the First World War
Speaker 1: and the economies of Allied countries are booming. In the
Speaker 1: United States, the stock market is roaring to all time
Speaker 1: highs and millions of Americans are investing their life savings
Speaker 1: into stocks, with many of them borrowing to invest even more.
Speaker 1: Fast forward to nine the economy is suddenly not looking
Speaker 1: so good, and the amount of debt that's been taken
Speaker 1: on by speculators has hit record highs, but the stock
Speaker 1: market keeps pumping, so it's totally fine. Suddenly, the stock
Speaker 1: market begins to dip and everyone who took on excessive
Speaker 1: leverage begins to sell, fearing that they wouldn't have enough
Speaker 1: to pay back all their debts. By October, the stock
Speaker 1: market is in free fall, with a famous four day
Speaker 1: flash crash, bringing the Dow Jones down by a staggering
Speaker 1: Over the next two years, the stock market goes onto
Speaker 1: fall by another eight percent, bringing the Dow Jones to
Speaker 1: a low of nine hundred points, a far cry from
Speaker 1: its high of nearly six thousand points. Naturally, the people
Speaker 1: in power blame the average person for the stock market implosion,
Speaker 1: and the U. S Government subsequently establishes the Securities and
Speaker 1: Exchange Commission, or SEC in four to make sure another
Speaker 1: stock market crash of that magnitude never happens again. Upon
Speaker 1: its creation, the SEC was tasked with three specific things.
Speaker 1: Protect investors, facilitate capital formation, and maintain fair, orderly and
Speaker 1: efficient markets. You'll know this if you've ever watched current
Speaker 1: SEC Chairman Gary Gensler speak more about what that looks
Speaker 1: like in the description. To that end, the SEC set
Speaker 1: a series of regulations that made it very difficult for
Speaker 1: regular investors to get access to high risk investments such
Speaker 1: as real estate crowdfunding, equity crowdfunding a k a. Investing
Speaker 1: in stocks before they list, hedge funds, and any form
Speaker 1: of venture capital a k a. Early company investing. As
Speaker 1: some of you will know, only so called accredited investors
Speaker 1: are allowed to invest in these high risk vehicles, and
Speaker 1: as far as I understand, this has been the case
Speaker 1: in the United States since ninety three, when the Securities
Speaker 1: Act was passed as part of the SEC's formation. Today,
Speaker 1: almost every country has specific criteria for what counts as
Speaker 1: an accredited investor. In the United States, you need to
Speaker 1: either make more than two grand per year, have a
Speaker 1: net worth of more than one million dollars excluding your
Speaker 1: primary residence, or be an executive in a company that's
Speaker 1: selling its equity. Fun fact, there is actually no test
Speaker 1: to become an accredited investor, at least not in the
Speaker 1: United States. Your status as an accredited investor is determined
Speaker 1: on a case by case basis by the company that's
Speaker 1: offering the assets you're trying to invest in, be it
Speaker 1: a hedge fund or otherwise. Now, as all of you
Speaker 1: will know, there's no risk without reward. Hence why this
Speaker 1: accredited investor scheme has been heavily criticized. Besides the fact
Speaker 1: that wealth isn't the best measure of knowledge or intelligence,
Speaker 1: the fact that these opportunities are only afforded to the
Speaker 1: rich means they only get richer. Take a second to
Speaker 1: consider that many accredited investors have made hundred x gains
Speaker 1: on regular stocks because they were able to buy before
Speaker 1: they listed. Never mind the multiple thousand x gains that
Speaker 1: vcs have made on many cryptocurrencies by buying before they
Speaker 1: were readily available. Meanwhile, retail investors are lucky to get
Speaker 1: the estimated average of ten percent per year on stocks,
Speaker 1: which is barely enough to hedge against official inflation figures.
Speaker 1: Never mind that the unofficial inflation figures suggest that it's
Speaker 1: twice as bad as it's being made out to be
Speaker 1: by politicians and the mainstream media. So now that you
Speaker 1: know about the history of retail investors and accredited investors,
Speaker 1: it's time to jump back in the time machine and
Speaker 1: turn the clock back from today by about two and
Speaker 1: a half years. It's the beginning of the pandemic, and
Speaker 1: nobody knows whether it's the return of the Black Death
Speaker 1: or just another flu. The scale of the uncertainty is
Speaker 1: causing stock markets to tank, and the urgency is forcing
Speaker 1: elected officials to shut everything down out of caution to
Speaker 1: ensure that the economy doesn't completely implode. Central banks drop
Speaker 1: interest rates to zero, and governments start sending out stimmy
Speaker 1: checks around the world. Millions of people suddenly find themselves
Speaker 1: sitting on more money than they had expected, mainly because
Speaker 1: there isn't really anything they can spend their money on
Speaker 1: besides food and rent. Assuming their rent payments aren't paused,
Speaker 1: which was apparently the case in many places. After binge
Speaker 1: watching flicks and completing every video game that's worth the effort,
Speaker 1: millions of people start to wonder what they can do
Speaker 1: next and notice that the stock market is rapidly recovering,
Speaker 1: and so they download an app like robin Hood and
Speaker 1: start reading about investing on Reddit. Fast forward to one
Speaker 1: the number of robin Hood users has more than doubled
Speaker 1: to over twenty million, the Wall Street Bets subreddit has
Speaker 1: balloon to over ten million members, and retail investors make
Speaker 1: up more than thirty of the quarterly trading volume in
Speaker 1: the US stock market, a record high. Realizing that high
Speaker 1: risk is the only way to get a high reward,
Speaker 1: millions of newly created retail investors start shoving their stimmy
Speaker 1: checks and savings into cryptocurrencies, volatile commodities, and tech stocks
Speaker 1: with extreme leverage as in the nine twenties. Many of
Speaker 1: them go into debt to invest even more. Then the
Speaker 1: retail investors realize something. If they coordinate their collective investments,
Speaker 1: they can create the kind of volatility that's required for
Speaker 1: massive returns, and so the so called retail apes pick
Speaker 1: a target. Melvin Capital a hedge fund that's aggressively shorting
Speaker 1: game Stop, a video game retailer. Now, for some context,
Speaker 1: shorting a stock typically involves borrowing it from a stockbroker
Speaker 1: and immediately selling it on the open market while promising
Speaker 1: to buy back and return the shares at some future date.
Speaker 1: The assumption is that the stock will be cheaper at
Speaker 1: that future date, and the difference becomes profit. What retail
Speaker 1: investors did in January one was collectively by game Stop
Speaker 1: stock so that its price went up. This forced Melvin
Speaker 1: Capital into a short squeeze, forcing the hedge fund to
Speaker 1: buy back the stock at a loss worth billions of dollars,
Speaker 1: which caused gm to pump even more. As it happens,
Speaker 1: Melvin Capital announced in May this year that it was
Speaker 1: going out of business, citing the MEME stock short squeezed
Speaker 1: as the main reason. As almost all of you will know,
Speaker 1: gm E wasn't the only time that this collective investment
Speaker 1: strategy was tried. There were attempts to pump other stocks
Speaker 1: like Tesla, precious metals like silver, and yes, cryptocurrencies like
Speaker 1: dos coin. Those who were able to ride the waves
Speaker 1: of volatility became incredibly wealthy, and most of the rest
Speaker 1: got wrecked. Now, there is definitely a discussion to be
Speaker 1: had about this practice, but I reckon it's one of
Speaker 1: the only ways that retail investors can create the same
Speaker 1: risk reward dynamic afforded to accredited investors. What's crazy is
Speaker 1: that most of these campaigns were successful, and collective action
Speaker 1: by retail investors continues to this day. A great example
Speaker 1: is Celsius's cell token, which has seen multiple short squeezes
Speaker 1: since the crypto platform went bankrupt. You can find out
Speaker 1: what happened there and what comes next for Celsius users
Speaker 1: by clicking the link in the description. Now, it's safe
Speaker 1: to say that the people in power weren't happy about
Speaker 1: the game Stop saga. I mean it basically marked the
Speaker 1: first time that retail investors were able to extract billions
Speaker 1: of dollars from the accredited investors. Historically, it's happened the
Speaker 1: other way around. This is arguably the real reason why
Speaker 1: robin Hood went as far as blocking the purchase of
Speaker 1: Meme stocks to prevent more collective investment from moving the market,
Speaker 1: something that came as a huge surprise to its users
Speaker 1: and isn't really in keeping with what the platform calls itself,
Speaker 1: is it. What's not that surprising is that one of
Speaker 1: the most popular members of the Wall Street Bets subreddit
Speaker 1: was subsequently sued for allegedly coordinating the manipulation of game
Speaker 1: stock stock, causing quote huge losses for select investors. I
Speaker 1: think you can guess who one of those select investors was. Luckily,
Speaker 1: it seems, the lawsuit was dismissed the following month, but
Speaker 1: this fellow was ill hit with a four million dollar
Speaker 1: fine for failing to disclose his game stop trades to
Speaker 1: his previous employer, a fine which was reportedly paid by
Speaker 1: his insurance company. The real trouble, however, came in April one,
Speaker 1: after Gary Gensler was made chairman of the SEC. If
Speaker 1: you watched our video about Gary in the SEC, you
Speaker 1: might recall that the first thing he did was announced
Speaker 1: that he would be going after robin Hood and other
Speaker 1: retail trading platforms. Specifically, Gary said the SEC would be
Speaker 1: going after the practice of payment for order flow, which
Speaker 1: I won't get into here for the sake of time,
Speaker 1: but feel free to watch my video from last year
Speaker 1: which breaks it down into detail for you top left. Anyways,
Speaker 1: a couple of months ago, Gary reiterated the SEC's intentions
Speaker 1: to crack down on payment for order flow, and according
Speaker 1: to crypto policy analyst Jake Chevinsky, the SEC is likely
Speaker 1: to take a lot of enforcement actions near the end
Speaker 1: of September, but as its fiscal year comes to a close,
Speaker 1: given that it has historically done this in Europe. Meanwhile,
Speaker 1: politicians are pushing an outright ban on payment for order flow,
Speaker 1: and it seems there's only one thing holding them and
Speaker 1: the SEC back public opinion. The average retail investor would
Speaker 1: probably rather not see their favorite stock trading platform go
Speaker 1: down the toilet. This is especially true because it seems
Speaker 1: that most retail investors are still heavily invested. According to
Speaker 1: a recent press release by trading platform e Toro, only
Speaker 1: eight percent of retail investors sold when the crypto and
Speaker 1: stock markets crashed in May and June six continued to hoddle,
Speaker 1: and twenty eight percent bought the dip wild Now, while
Speaker 1: e Toro is just one trading platform, I reckon it's
Speaker 1: reasonable to assume that it's a similar story on others,
Speaker 1: especially since another analysis by The Wall Street Journal recently
Speaker 1: found that retail investors continue to pour record amounts of
Speaker 1: money into the market. This is believed to be because
Speaker 1: retail investors can see that the markets quickly recovered after
Speaker 1: all recent crashes, and many of them are still in
Speaker 1: the green overall due to the appreciation of house prices
Speaker 1: and other assets they own. In other words, retail investors
Speaker 1: haven't capitulated yet. That last word is key because it
Speaker 1: suggests that the stock market is headed lower, and all
Speaker 1: the bearish macro factors certainly suggest this is the case.
Speaker 1: So riddle me this, what happens when the stock market
Speaker 1: crashes by another twenty maybe even while all other assets
Speaker 1: where the middle class store their wealth, like houses and cars,
Speaker 1: start to crash. Two. That's right, you're going to have
Speaker 1: lots of retail investors demanding regulation and retribution. If you
Speaker 1: need any evidence of this order of events, look no
Speaker 1: further than the crypto market. Since the crypto market crash
Speaker 1: in May, we've seen no shortage of lawsuits alleging that
Speaker 1: certain cryptocurrencies are securities, that certain exchanges engaged in market manipulation,
Speaker 1: and other such shenanigans. More importantly, we've seen countries around
Speaker 1: the world announced that they're going to start clamping down
Speaker 1: on crypto or, to use their words, quote protect investors,
Speaker 1: which is of course code for preventing retail investors from
Speaker 1: accessing certain coins, tokens, and investment vehicles. The first country
Speaker 1: to restrict retail access to cryptocurrency was actually the United
Speaker 1: Kingdom in October twenty when our fabulous Financial Conduct Authority
Speaker 1: or f c A banned the sale of crypto derivatives
Speaker 1: to retail consumers. This included stuff like futures options and
Speaker 1: even e t n s, which are like e t
Speaker 1: fs for reference. Derivatives allow retail investors to take on
Speaker 1: the same kind of risks that accredited investors regularly take,
Speaker 1: but it also adds a lot of volatility to the
Speaker 1: crypto market when over leverage long or short traders are liquidated.
Speaker 1: More about that in the description I digress. In one,
Speaker 1: we saw Hong Kong regulators proposed banning retail investors from
Speaker 1: the crypto market, and a few months later, China began
Speaker 1: its latest crypto crackdown, which likely affected most retail investors
Speaker 1: and likely left many wealthy a k a. Accredited investors unscathed.
Speaker 1: Following the crypto market crash that was caused by China's crackdown,
Speaker 1: we saw regulators increase their scrutiny of the crypto industry
Speaker 1: by forcing k y C on exchanges, banning tokens, peg
Speaker 1: to stocks, restricting derivatives trading, and presumably pushing exchanges to
Speaker 1: reduce the leverage they offer. Following the crypto market crash
Speaker 1: this year that was caused by terrorist collapse, we saw
Speaker 1: regulators return with the same screwed me with Dutch authorities
Speaker 1: calling for crypto derivatives to be restricted to accredited investors
Speaker 1: and Australian banks saying they will not quote endorse retail speculation.
Speaker 1: In South Korea, regulators announced they would be cracking down
Speaker 1: on crypto exchanges because of terror's collapse. Terror was from
Speaker 1: South Korea, and regulators in Thailand demanding that crypto exchanges
Speaker 1: delist meme coins, n f t s, and social tokens.
Speaker 1: More recently, Singapore announced it wants to limit retail crypto investment,
Speaker 1: and as I mentioned in the introduction, in Canada, the
Speaker 1: Ontario SEC set an annual limit of thirty thousand Canadian
Speaker 1: dollars on all coin investments for citizens of the province,
Speaker 1: which presumably excludes accredited investors. I'll reiterate that most, if
Speaker 1: not all, these restrictions are being encouraged, if not outright
Speaker 1: called for, by disgruntled cryptocurrency investors, and our caution that
Speaker 1: it's more than likely that we're going to see the
Speaker 1: crypto market go much lower later this year, along with
Speaker 1: the stock market. When this inevitably happens, you can bet
Speaker 1: that there will be even more calls for crypto regulation
Speaker 1: and retribution, most of which will inevitably result in retail
Speaker 1: investors like you and me having even less access to
Speaker 1: cryptocurrencies and all the different ways you can trade them.
Speaker 1: What's even more concerning is that this will make it
Speaker 1: that much more difficult for new crypto projects to get
Speaker 1: off the ground, since there will be more exclusive to
Speaker 1: accredited investors than ever before. Not only that, but it
Speaker 1: will be even more difficult for quality crypto projects to
Speaker 1: be created because all of them will have massive pre minds,
Speaker 1: with most of the supply going to vcs and early investors.
Speaker 1: In short, cutting retail investors out of the crypto market
Speaker 1: could do serious damage to the potential of the entire industry,
Speaker 1: and this begs the question of where this push to
Speaker 1: remove retail investors is coming from and what you can
Speaker 1: do to keep your head in the game. For as
Speaker 1: long as possible. If you watched our video about the
Speaker 1: top ten crypto partnerships from last year, you might recall
Speaker 1: that New York Digital Investment Group or n y d
Speaker 1: i G and the National Cash Register or n c
Speaker 1: R entered a partnership to make it possible for commercial
Speaker 1: banks in the US to offer cryptocurrency investing and trading.
Speaker 1: This partnership happened because commercial banks could see that billions
Speaker 1: of dollars were flowing from their balance sheets into cryptocurrency exchanges,
Speaker 1: something they aren't happy about, because playing with the money
Speaker 1: you've deposited in the bank is how commercial banks make
Speaker 1: their money. Commercial banks thought that offering cryptocurrency investing and
Speaker 1: trading in house would bring back most, if not all,
Speaker 1: the money that had fled from their balance sheets to
Speaker 1: coin based, robin Hood and others, and at first glance,
Speaker 1: this strategy makes sense upon SA inspection. There's a problem, though,
Speaker 1: and that's that commercial banks can't offer mid cap and
Speaker 1: small cap alt coins for regulatory reasons. By now, you
Speaker 1: should know that volatile alt coins are ultimately what attracts
Speaker 1: retail investors to coin base and robin Hood. They aren't
Speaker 1: there for BTC and eath case and point dose coin
Speaker 1: trading accounted for a whopping fort of robin Hood's cryptocurrency
Speaker 1: revenue in the third quarter of last year, and almost
Speaker 1: seventy of trading volume on coin base was related to
Speaker 1: all coins in the fourth quarter of last year. And
Speaker 1: never mind all the billions flowing into stable coins. So
Speaker 1: another question for you, what happens when your top competitors
Speaker 1: are offering a product that you can't possibly hope to offer.
Speaker 1: That's right, you throw your toys out the pram, go
Speaker 1: crying to the regulators, and rile up disgruntled retail investors
Speaker 1: by paying for mainstream media articles about how horrible cryptocurrency is.
Speaker 1: That's why I don't think it's a coincidence that the
Speaker 1: SEC is targeting alt coins and cryptocurrency exchanges offering said
Speaker 1: all coins. Come to think of it, the real reason
Speaker 1: why the SEC went after x RP could have simply
Speaker 1: been because it was one of the most traded cryptocurrencies. Now,
Speaker 1: in case you didn't put two and two together, restricting
Speaker 1: retail investors from accessing alt coins and forcing cryptocurrency exchanges
Speaker 1: to delist all coins is exactly how you drain the
Speaker 1: cryptocurrency exchanges dry. It's the only source of revenue that
Speaker 1: the commercial banks can't compete with. As I mentioned a
Speaker 1: few moments ago, it also has the convenient side effect
Speaker 1: of stunting cryptos growth and adoption. And I suspect that
Speaker 1: the few coins and tokens which survive the scourge will
Speaker 1: be those that accredited investors and Wall Street love the most.
Speaker 1: I think you know which ones I'm talking about. As
Speaker 1: far as I can tell, the only defense against this
Speaker 1: will be to stick to truely decentralized finance, which will
Speaker 1: continue to be accessible through various bridges and smart contract
Speaker 1: cryptocurrency coins. Assuming the people in power don't take control
Speaker 1: of the proof of stake blockchains, these defied protocols live on.
Speaker 1: And don't even get me started about how the Financial
Speaker 1: Action Task Force or fat F wants to eventually make
Speaker 1: it impossible for you to withdraw any crypto by labeling
Speaker 1: such activities as high risk. If you ask me, the
Speaker 1: real question is whether regulators will go as far as
Speaker 1: restricting retail access to other investments such as stocks. History
Speaker 1: suggests that they will do exactly that if the market
Speaker 1: crash is bad enough and the SEC is reportedly planning
Speaker 1: on changing the definition of accredited investor already. One thing's
Speaker 1: for sure, and that's that the people in power want
Speaker 1: to make sure that retail investors can't collectively pump stocks
Speaker 1: to the detriment of accredited investors. Ever again, never mind
Speaker 1: that it could become a form of protest quite soon,
Speaker 1: since financial loss is the only language they understand. For
Speaker 1: what it's worth, We're unlikely to see a full on
Speaker 1: retail trading ban, and that's simply because the World Economic
Speaker 1: Forum wants retail investors to put their stimmies, savings and
Speaker 1: loans into e s G, which is really just the
Speaker 1: United Nations dystopian thirty sustainable Development Goals in disguise. You
Speaker 1: can learn more about the dangers of e s G
Speaker 1: using the link in the description. It's only a few
Speaker 1: weeks away. One of the most consequential crypto events to
Speaker 1: date is almost upon us. I am, of course talking
Speaker 1: about the eth merge, the long awaited transition to a
Speaker 1: new consensus mechanism that could have massive implications for the
Speaker 1: Ethereum network. But there are also serious tail risks that
Speaker 1: you need to know about. So my video today I'm
Speaker 1: going to give you an update on Ethereum look at
Speaker 1: the bull and bear cases and explain exactly what all
Speaker 1: this could mean for the price of So don't go anywhere. Now,
Speaker 1: in case you've been living under a rock for the
Speaker 1: past year, and let's face it, rent rises are heading
Speaker 1: that way, you'll know that the Ethereum network is about
Speaker 1: to transition to proof of steak. The actual transition is
Speaker 1: called the merg, and it's the first step in a
Speaker 1: number of upgrades designed to make Ethereum more scalable and
Speaker 1: hence more usable. Now I've covered the upgrades add nauseum
Speaker 1: on the channel, and I'll link to a number of
Speaker 1: videos below that go into it in much more detail. Now,
Speaker 1: the merger has already been launched on a number of
Speaker 1: public Ethereum test nets. These include the likes of Robston, Cipolia,
Speaker 1: and most recently Girly. Girly made the merge on the
Speaker 1: tenth of August, and while there was a slight drop
Speaker 1: in the participation rate, it's still added up to another
Speaker 1: successful merge dress rehearsal. Things were going so well on
Speaker 1: the test nets that they've even gone through post merge upgrades. Cepolia,
Speaker 1: for instance, recently underwent a simple yet important update the
Speaker 1: stars appeared to be aligned, and following these successful test
Speaker 1: net mergers, we got the news that the actual merge
Speaker 1: could come even sooner, as the potential date for the
Speaker 1: big day was moved from the nineteen September to This
Speaker 1: was great news for the Ethereum community, which has arguably
Speaker 1: grown a little jaded by all the memes of Ethereum
Speaker 1: merged delays, however hilarious some of them may be. Now
Speaker 1: there is a bit of nuance here, of course, from
Speaker 1: the fact that the actual date is determined by blocks
Speaker 1: rather than the deavs themselves, So with that in mind,
Speaker 1: last week the Ethereum Foundation disclosed the official parameters for
Speaker 1: the main net merge to take place. Firstly, on the
Speaker 1: sixth of September, the Bellatrics upgrade will be implemented. This
Speaker 1: is the upgrade that will be responsible for setting the
Speaker 1: rest of the merge process in motion. The next step
Speaker 1: after this will be the triggering total difficulty or t
Speaker 1: t D. At this block over here, this could be
Speaker 1: reached anywhere between the tenth and the twentieth, although the
Speaker 1: devls have given that narrower timeline between the fifteenth and
Speaker 1: sixteenth that I mentioned earlier. T T D is required
Speaker 1: because this is the mechanism that will make it unprofitable
Speaker 1: to mine the proof of work chain and thus force
Speaker 1: the merge. Now, if all this sounds sort of familiar,
Speaker 1: that's because t t D has also been rather more
Speaker 1: excitingly termed the difficulty bomb. Now, of course, many miners
Speaker 1: protested at this and threatened to fork and then mine
Speaker 1: a proof of work chain. However, these aspirations appear to
Speaker 1: have been short lived as stable coin issuers like Circle
Speaker 1: and Tether signaled support for the proof of state chain.
Speaker 1: Given how dependent defies on stable coins, this maybe the
Speaker 1: death knell for any contentious forks. Okay, so that's where
Speaker 1: we're currently at with the merge and its timeline, and
Speaker 1: there's a lot of excitement around all this, no doubt
Speaker 1: about it. However, in the past few weeks some of
Speaker 1: that excitement has turned to concern, concern surrounding the concept
Speaker 1: of censorship. Allow me to explain. On the eighth of August,
Speaker 1: the Office of Foreign Assets Control o FAC, a department
Speaker 1: of the U. S. Treasury, took the unprecedented step of
Speaker 1: sanctioning code and by that I mean they officially placed
Speaker 1: the Tornado Cash smart contract on the specially Designated Nationals
Speaker 1: and blocked persons or SDN list. I won't go into
Speaker 1: it in too much detail here, as I've covered it
Speaker 1: in much more depth in a previous video and that
Speaker 1: be in the top right. But the reason why this
Speaker 1: had such large implications for the Ethereum network, specifically around
Speaker 1: the merge, is how various stakeholders in the Ethereum ecosystem responded.
Speaker 1: You see, because the Tornado Cash smart contract was sanctioned,
Speaker 1: this meant that all of those users who had interacted
Speaker 1: with it could potentially be violating sanctions. All those doubts
Speaker 1: that allowed funds from the smart contract could be facilitating
Speaker 1: sanctions of Asian Even those miners who mind a block
Speaker 1: that had a Tornado Cash transaction in it could be
Speaker 1: falling foul of the law. The result was a lot
Speaker 1: of these services and companies blacklisting the addresses and restricting
Speaker 1: support for them. Examples include UNI, swap, d y d X,
Speaker 1: and r blocking front end access, Infura and Alchemy restricting
Speaker 1: access to their RPC notes, Circle blacklisting all of the
Speaker 1: addresses that were associated with made a Cash. However, none
Speaker 1: of these threatened the immutability of the blockchain that's until
Speaker 1: we learned that some miners such as ether Mine were
Speaker 1: censoring transactions at the protocol level. They stopped including Tornado
Speaker 1: Cash router transactions the moment that the sanctions were announced.
Speaker 1: This is particularly concerning for the merge because when Ethereum
Speaker 1: initially transitions, there will be a great deal of validator centralization.
Speaker 1: You can see exactly who the largest validators are over
Speaker 1: here coin Base, Binance, Kraken, and Lido Finance. Those validators
Speaker 1: based in the United States will have to make a
Speaker 1: decision as to whether or not they're going to censor
Speaker 1: transactions related to the Tornado Cash smart contract. If enough
Speaker 1: of them decide to do that, then you have censorship
Speaker 1: at the protocol level. Coin Basis CEO has said that
Speaker 1: if this hypothetical was a thing, then they would down
Speaker 1: their staking operations instead of censoring. We'll have to take
Speaker 1: his word for it on that now. Even in the
Speaker 1: case of Lido, which is a DOW, a great many
Speaker 1: of its backers are US based vcs. They may control
Speaker 1: a lot of the supply and hence vote within the
Speaker 1: DOW to censor these specific transactions. More signs of potential
Speaker 1: censorship on the proof of stake chain came when flash Pots,
Speaker 1: the developer behind MTV boost, confirmed that they would be
Speaker 1: complying with the o fact sanctions. To give some context,
Speaker 1: MTV boost is an optional piece of software for the
Speaker 1: proof of stake chain which will separate builders who create
Speaker 1: the blocks from the proposers who propagate those blocks. It's
Speaker 1: basically software that will help validators extract mt V the
Speaker 1: extra income that validators can earn by strategically selecting the
Speaker 1: transactions that they add to a given block. Now, if
Speaker 1: this is confusing, I'll leave some resources about MTV in
Speaker 1: the description. Anyways, what the flashbot devs were considering would
Speaker 1: be to censor the default relay that it used to
Speaker 1: pass pre built blocks from builders to the proposers. However,
Speaker 1: the flashbots would be coded to exclude those transactions involving
Speaker 1: addresses that are linked to Tornado cash. This caused quite
Speaker 1: a backlash in the community, so much so that the
Speaker 1: devs decided that they should aim to get the code
Speaker 1: into the developers hands earlier than planned so they can
Speaker 1: choose their own relayers. But the fact that developers of
Speaker 1: tools used in proof of state ethereum are already considering
Speaker 1: censorship has ruffled a few feathers. It was also a
Speaker 1: hot topic at the Ethereum Core Developers meeting on the
Speaker 1: eighteenth of August. Many of the developers on the call
Speaker 1: were adamant that the censorship resistant qualities of the network
Speaker 1: should be upheld at all costs. For example, Marius van
Speaker 1: der Veeden said quote, if we allow censorship of user
Speaker 1: transaction on the network, then we basically failed. This is
Speaker 1: the hill that I'm willing to die on. If we
Speaker 1: start allowing users to be censored on Ethereum, then this
Speaker 1: whole thing doesn't make sense and I will be leaving
Speaker 1: the ecosystem. Despite this stance, though it wasn't immediately clear
Speaker 1: what should be done before the merge in order to
Speaker 1: prevent the censorship risks I just mentioned, some were calling
Speaker 1: for slashing of those validations that would censor transactions, called
Speaker 1: social slashing. Now. The best argument I've seen for this
Speaker 1: is by researcher and blogger Eric Wall. He makes the
Speaker 1: case for social slashing and an Ethereum user activated soft fork.
Speaker 1: It's a really compelling piece, and I'll leave a link
Speaker 1: to it in the description. Eric even polled many in
Speaker 1: the ethereum community as to whether they would support social slashing,
Speaker 1: and it seems as if most did support the idea.
Speaker 1: The v dog himself also replied saying that he too
Speaker 1: voted for it. So it's clear social slashing right. Well,
Speaker 1: it's definitely not an ideal solution. You're effectively telling validators
Speaker 1: that they should risk violating sanctions or have their stakes slashed.
Speaker 1: If these were the likes of exchanges, for example, then
Speaker 1: it's the innocent users who'll see their deposits lost. Moreover,
Speaker 1: there's a risk of a chain split if enough of
Speaker 1: the larger validators decide to go down the censorship route. Essentially,
Speaker 1: by opting for the social slashing option, the developers are
Speaker 1: asking larger validators to choose between continuing on the current
Speaker 1: chain and breaching sanctions, or complying with o fac and
Speaker 1: coordinating with other validators to split the chain. Now, this
Speaker 1: is explained in more detail in this Twitter thread by
Speaker 1: Justin Bonds, which I'll leave in the description for you
Speaker 1: as well. It's definitely a messy situation and there could
Speaker 1: be collateral damage. The main question then becomes if the
Speaker 1: collateral damage is worth it. It will be interesting to
Speaker 1: see how all this develops over the coming weeks as
Speaker 1: we roll closer to the merge. It's also worth noting
Speaker 1: that there is some political pushback against these sanctions to
Speaker 1: lobby groups such as coin Center seem to be staging defenses,
Speaker 1: and politicians such as Representative Tom Emma have also been
Speaker 1: pushing back. This is a story that's going to run
Speaker 1: and run, and its outcome will have enormous consequences for
Speaker 1: all of cryptocurrency. Moving on, though, there is something else
Speaker 1: to really look forward to about the merge, and that's
Speaker 1: the change in Eath's tokenomics and their impact on the price.
Speaker 1: So let's look into that, shall we. I'm sure you've
Speaker 1: all no doubt heard about the triple harving. It's the
Speaker 1: massive inflation reduction that will come to the Ethereum network
Speaker 1: because of the move to proof of steak. With the
Speaker 1: Bitcoin harving, we know that block rewards have every few years.
Speaker 1: As we move closer to a protocol defined limit, this
Speaker 1: cuts the inflation rate by about However, with Ethereum, there
Speaker 1: will be a number of factors that are going to
Speaker 1: be coming together that will seriously reduce ETH inflation. For one,
Speaker 1: the move to proof of steak is expected to drop
Speaker 1: ETH issuance from about four point one three percent to
Speaker 1: zero point four nine percent post merge. This is about
Speaker 1: a ninety percent reduction in the emission rate, which equates
Speaker 1: to roughly three harvings. So that's where the saying comes from.
Speaker 1: And if you subscribe to the school of thought that
Speaker 1: bitcoin harvings are price positive, a triple eth harving should
Speaker 1: make you like three times as bullish. Hey maths Now,
Speaker 1: in all seriousness, thoth, a reduced supply with a constant
Speaker 1: demand should be price positive. And then of course you
Speaker 1: also have to take into account the impact that fee
Speaker 1: burns will have on that supply. As a result of
Speaker 1: the London upgrade from last year, a small bit of
Speaker 1: eth base fees are burned, which also impacts on the
Speaker 1: available ETH supply. These burns are of course variable and
Speaker 1: will differ based on network use. Current burn rates are
Speaker 1: about four k either year, which if consistent, would drop
Speaker 1: the supply growth to a smidge under zero point two
Speaker 1: per year. But the real kicker is that if network
Speaker 1: demand on ethereum surges post merge, then this could lead
Speaker 1: to a great deal more fee burns and ETH could
Speaker 1: even become deflation ry. This is something you can actually
Speaker 1: simulate for yourself over on ultrasound dot money. Negative issuance
Speaker 1: means you will have a deflation recurrency, currency that's gradually
Speaker 1: decreasing in supply and thus becoming much more valuable. Naturally,
Speaker 1: this should be price positive. However, this may not have
Speaker 1: an immediate impact post merge, as it will take some
Speaker 1: time for the supply and demand dynamics to play out. Moreover,
Speaker 1: there are a number of other factors that will impact
Speaker 1: the price around the merge, some to the upside, some
Speaker 1: to the downside. For this analysis, I'm going to borrow
Speaker 1: from a blog post by the one and only Arthur Hayes.
Speaker 1: It's called e flexive and I've linked to it below. Essentially,
Speaker 1: in this piece, he tries to apply George Soros's quote
Speaker 1: theory of reflexivity to the eth markets, especially as it
Speaker 1: relates to the merge. This theory was something that Sorous
Speaker 1: actually detailed in a book that he wrote called The
Speaker 1: Alchemy of Finance. What the theory posits is that there
Speaker 1: is a feedback loop between market participants and market prices.
Speaker 1: Quite simply, the actions of market participants around a particular
Speaker 1: event or situation could actually influence how the event plays out. Anyways,
Speaker 1: In Hayes's reflexivity model, he has a number of inputs
Speaker 1: and outputs. On the input side, we have the event,
Speaker 1: which is of course the merge. Then you have the
Speaker 1: structural flows that will impact on the supply. As I
Speaker 1: mentioned earlier, the amount of supply is impacted by the
Speaker 1: amount of burn, which is driven by usage. And when
Speaker 1: it comes to that, there are two factors that investors
Speaker 1: will need to consider when choosing which layer one network
Speaker 1: to use. Firstly, you have mind share, which is basically
Speaker 1: how well the network is known in the online sphere.
Speaker 1: It's no secret that the interest in Ethereum, for example,
Speaker 1: tracks the price. The higher eth goes, the more people
Speaker 1: search for it, and the more mind share there is,
Speaker 1: the more people buy, The higher the price, the more mindshare,
Speaker 1: and so on and so on. Then secondly, you have
Speaker 1: applications that's driven by how many developers are building on
Speaker 1: the network. The number of developers is related to the
Speaker 1: number of users on the network, and given that the
Speaker 1: number of users is related to the price, that means
Speaker 1: that the number of devs and depths must also be
Speaker 1: related to price. This means that users and developers share
Speaker 1: a reflexive relationship with now When it comes to the
Speaker 1: outputs of this model, we have the amount of being burned.
Speaker 1: As we've established, this is related to network demand, which
Speaker 1: is driven by debt usage and number of users, which
Speaker 1: is itself driven by price naturally by the transitive property.
Speaker 1: That means that the level of deflation the burn has
Speaker 1: a reflexive relationship with the price of E. In the
Speaker 1: most basic of terms, a higher price translates into more deflation. Now,
Speaker 1: there are two outcomes around the merge. It happens or
Speaker 1: it doesn't. In the case of the former, there will
Speaker 1: be a positive reflexive relationship between the price and deflation.
Speaker 1: Will be bought today knowing that higher prices will translate
Speaker 1: into higher burns using the logic we just explained. However,
Speaker 1: if the merge doesn't happen, we will have a negative
Speaker 1: reflective relationship. People will know that the expected deflation is
Speaker 1: not coming and hence won't want to hold E. Now,
Speaker 1: Hayes does, of course mention that there will be a
Speaker 1: flaw here. That's because merge or not ethereum is still
Speaker 1: the dominant layer one and has the vast majority of
Speaker 1: debts built on it. Hayes thinks that won't go below
Speaker 1: eight hundred dollars to one thousand dollars in this case
Speaker 1: a reasonable assumption. So that's the theory of reflexivity. The
Speaker 1: rest of Hayes's post goes on to look at the
Speaker 1: market's view of a successful eth merge. He takes a
Speaker 1: look at price futures, term structure, and futures open interest
Speaker 1: to give a rough idea of how traders are positioned
Speaker 1: and hedged. He then also looks at a number of
Speaker 1: trading decisions that one can take in order to both
Speaker 1: position for a successful merge and to hedge against an
Speaker 1: unsuccessful one. For the sake of time, I won't go
Speaker 1: into any of these here, but I do encourage you
Speaker 1: to read the post at your leisure. It's well worth
Speaker 1: your time. Now. We of course can't discount the potential
Speaker 1: for a by the rumor kind of event around the merge.
Speaker 1: That is, that prices could fall immediately post merge as
Speaker 1: people sell the news. However, because of the unique dynamics
Speaker 1: around the harving, this cannot be guaranteed, something I tend
Speaker 1: to agree with. Hayes then concludes by saying that he
Speaker 1: won't be reducing his position going into the merge or
Speaker 1: after it In fact, he may even add to it
Speaker 1: if the market sells off post merge, because quote, I
Speaker 1: believe the best is not and cannot be priced into
Speaker 1: the market today. Wise words from a trading sense. Okay,
Speaker 1: time for some of my own thoughts on the eth merch. Firstly,
Speaker 1: in case the merch didn't make it obvious, this is
Speaker 1: all my opinion as a non financial advisor, so I
Speaker 1: do encourage you to d y O R in conjunction
Speaker 1: with your financial advisor. Having said that, I am cautiously
Speaker 1: optimistic that the urge is going to go ahead as planned.
Speaker 1: The deaths have been working tirelessly, and numerous test net
Speaker 1: mergers have all gone off without any major issues. Moreover,
Speaker 1: the threat posed by proof of work forks appears to
Speaker 1: have been muted by the overwhelming institutional support for the
Speaker 1: proof of stake chain. Yet that institutional support is a
Speaker 1: double edged sword, and that's because of the unfortunate situation
Speaker 1: we found ourselves in due to the Tornado cash sanctions.
Speaker 1: It's still not entirely clear as to how the community
Speaker 1: is going to deal with the risk of protocol level censorship,
Speaker 1: but one thing is for certain. No validator is going
Speaker 1: to risk thirty years in prison. No matter how strong
Speaker 1: the need for a permissionless ledger, could the Ethereum developers
Speaker 1: implement social slashing or is the centering of Tornado cash
Speaker 1: transactions a choice that should be left up to the validators.
Speaker 1: Is it something that will have to lay upon the
Speaker 1: altar as a sacrifice for that holy institutional adoption. I
Speaker 1: don't know, but it's something I'll be keeping a super
Speaker 1: close eye on as we approach the merge. And of
Speaker 1: course another thing that I'll be keeping an eye on
Speaker 1: is the price. That triple harving is no joke, and
Speaker 1: if the price is positively reflexive to the burn, then
Speaker 1: we could see some serious upside potential as we roll
Speaker 1: closer to the merge date. Higher prices drive more users,
Speaker 1: which drives more depths, which drives more depths, which drives
Speaker 1: more burn, which drives a higher price. It's a heavenly
Speaker 1: cycle that maybe even George Soros himself is keeping an
Speaker 1: eye on. With all that said, though there are still risks.
Speaker 1: There is a non zero chance of a severe, even
Speaker 1: cataclysmic event around the merge. No matter how many test
Speaker 1: net merges one does, it can never really compare to
Speaker 1: a live push hundreds of billions of dollars are on
Speaker 1: the line, and there is only one shot that can
Speaker 1: be taken. As such, if you are investing based on
Speaker 1: a bull case of the merge, as I am, then
Speaker 1: you have to be aware of these risks, never invest
Speaker 1: more than you can afford to lose, and manage your
Speaker 1: expectations accordingly. And that's it for my Ethereum update today.
Speaker 1: It really is an exciting time and I would love
Speaker 1: to get some of your feedback on it all. So
Speaker 1: are you bullish on the merge or are you concerned
Speaker 1: about transaction censorship? What are your price predictions? I'd love
Speaker 1: to know in the comments below. Thank you so much
Speaker 1: for listening to the coin Bureau podcast. If you'd like
Speaker 1: to learn more about cryptocurrency, you can visit our YouTube
Speaker 1: channel at YouTube dot com forward slash coin Bureau. You
Speaker 1: can also go to coin bureau dot com for loads
Speaker 1: more information about all things crypto. You can follow me
Speaker 1: on Twitter at at coin bureau or one word, and
Speaker 1: I'm also active on TikTok and Instagram too. To hold
Speaker 1: kone hold con