Elon Musk and the art of whale-spotting

plus some discussion of hardware wallets and privacy coins

This is Something Interesting, an independent, ad-free roundup of interesting Bitcoin and economics news along with my commentary and perspective. If someone forwarded you this newsletter, you can get it for yourself by clicking here.

In this issue:

  • Elon Musk and the art of whale-spotting

  • How to store your Bitcoin (reader submitted)

  • Bittrex abruptly delists privacy coins

Did Elon Musk just load up on Bitcoin?

Legendary shitposter Elon Musk (who I suppose is also CEO of Tesla and SpaceX) recently took to Twitter with a meme about being tempted by Bitcoin. The meme itself is a little classless for my taste so I’m not going to embed it here, but the conversation that followed was quite interesting:

Michael Saylor is the CEO of Microstrategy - nominally a business software company but recently more famous for having moved the majority of its treasury into Bitcoin. Microstrategy stock has more than doubled since that announcement. This is a really interesting strategy for an otherwise lackluster business - a share of MSTR (~$388 at time of writing) is now effectively also exposure to 0.0076btc (~$243 at time of writing). So in some ways Microstrategy has become another backdoor way to add Bitcoin to a portfolio constrained to ordinary equities. But equally interesting was that purchasing that much bitcoin left a visible bidding pattern in the marketplace … and someone appears to be using that same playbook again:

Starting at around ~$26,800 (i.e. a few days after the conversation between Saylor and Musk) the Coinbase order book started to show the same fingerprint of someone leaving and refilling 20-40btc open bids. Speculation immediately emerged as to who was behind these new purchases:

On January 2nd there was an enormous wave of bitcoin withdrawn from Coinbase. More than 36,000 btc was withdrawn - worth ~$1.1B at the time.

So did Elon Musk just take his first taste of decentralized candy? Perhaps. Whoever it was, they seem to have acquired quite a taste for it.

The problem with hardware wallets

“Would be curious to hear an elaboration on your thoughts on hardware wallets” - BS

Sure thing! First, what exactly is a hardware wallet? A hardware wallet is basically a specialized computer that is designed to manage the private keys that secure various cryptocurrencies like Bitcoin. They plug into a computer via the USB port and then the computer sends Bitcoin transactions to the device, which signs them using the private keys it is storing. The idea is that these devices are too simple and too locked down for malware to reach them, so you can use them to safely transact in Bitcoin without worrying about whether there is malware on your laptop.

I personally don’t recommend hardware wallets for a few of reasons.

  1. You have to trust the manufacturer. If you don’t buy from the manufacturer directly you also have to trust anyone in the supply chain. Any of them could have manipulated or tampered with the device.

  2. It doesn’t make you as safe as it feels. There are still lots of attacks (like address replacement, for example) that can still cause you to lose money even if the hardware wallet itself hasn’t been compromised.

  3. It is bad opsec. Anyone who bought a Ledger wallet in the last few years just had their name, address and phone number publicly leaked. Buying a hardware wallet reveals your intention to self-custody crypto.

A hardware wallet doesn’t do anything a cheap air-gapped linux laptop couldn’t do - so hardware wallets are basically an aesthetic choice. They look cool. They feel secure.

To be honest, if you are relatively new to crypto or your stake is still small, I actually don’t recommend trying to self-custody at all. It is quite easy to lose money learning how to use Bitcoin directly (I know because I’ve done it myself). Historically Bitcoin exchanges were both very shady and very incompetent, so the culture developed a strong ethos of ‘not your keys, not your coins’ but I think the truth is more complicated. By choosing to withdraw from an exchange you are not eliminating risk you are just replacing the risk that the exchange screws up (or screws you over) with the risk that you screw things up yourself.

If you decide to self-custody, my personal recommendation* for cold storage right now is Cryptosteel because it is fire/flood/hacker proof and straightforward to use. I only recommend offline storage - if you’re planning on keeping your bitcoin online you may as well leave them on the exchange.

*Reminder that Something Interesting is ad free and has no sponsors. I am not your financial advisor and this is not financial advice. Make your own choices.

Bittrex abruptly delists privacy coins

On New Years Day US based exchange Bittrex announced a plan to delist all three privacy coins ($XMR, $ZEC and $DASH) from their exchange:

Privacy coins are cryptocurrencies that specialize in making transactions that are invisible to third parties - like the kind of third parties that enforce financial regulations for example. Speculation that this was the first step in a broader FATF action against privacy coins caused all three coins to drop significantly.

This looks more like something specific to Bittrex, though - Zooko (founder of $ZEC) offered this oblique comment on the situation:

Maria Pesce of Gemini also observed that every asset on Gemini ($ZEC included) has received NYSDFS approval.

Interestingly Bittrex doesn’t even actually support using $ZEC in a private way (and Gemini does). So the issue here doesn’t seem to be privacy technology in general so much as something more specific to Bittrex. It’s tough to say what exactly the issue is here but I don’t see this as an omen of regulatory hostility to privacy coins.

I do think that we are seeing an end to the wait-and-see posture regulators have largely taken up to this point. Going forward it appears regulators will be increasingly willing to take direct action. That’s probably pretty healthy for consumers, if not for businesses hoping to skirt those regulations.

Other things happening right now: