All posts by TrueEconomics

15/2/21: Pump & Dump, Illicit Finance and Market Inefficiency: Cryptos under Review

 A fascinating fresh survey of microeconomics literature on crypto currencies: "The Microeconomics of Cryptocurrencies" by Hanna Halaburda, Guillaume Haeringer, Joshua Gans, Neil Gandal (CESifo Working Paper 8841, 2021, NBER version link here: https://www.nber.org/papers/w27477).

The paper is really too extensive to summarize here, so I encourage everyone interested in cryptos to read it. I can, however, offer some non-priority ordered comments on some of the passages I find interesting and novel.

Let's start with 'efficiency' and the 'nothing-at-stake problem'. Authors reference Saleh (2019) which derives "sufficient conditions that guarantee that consensus" to fork is an equilibrium. "Saleh then derives two additional results. 

  1. "First, restricting the ability to large stakeholders facilitates and speeds up consensus in case of a fork. The intuition is that [large] stakeholders have the most to lose from a disagreement, i.e., from the persistence of two or more branches." This seems to me a built-in incentives mechanism for increasing concentration of holdings of cryptos. Just as monopolistic power can lead to cartelization and collusion, so is the need for faster / more efficient consensus on development can lead to market dominance and concentration. The side effect of this would be likely reduced liquidity and also likely manipulation of exchange rates. Neither is good for cryptos susceptible to concentration becoming actual money (unit of account, unit of storage, unit of exchange).
  2. Second, "Saleh finds that the lower the miners' reward the better. The reason behind this counter-intuitive result is that low rewards enable the accumulation of vested interest in the blockchain (i.e., miners have less incentives to cash out their tokens). Given this, preserving one's vested interest in the blockchain (the tokens) increase the incentives to favor consensus." This is ugly. It further compounds holdings concentration and reduces liquidity. Worse, by inducing longer holding time horizons, it risks potential over-reaction to price movements in the longer run, so that markets price discovery can be severely restricted, and financial bubbles can form and inflate faster and more viciously.
Another issue, relating to efficiency, is transaction costs: the paper reviews Huberman et al. (2019) on this. There are several problems relating to the Bitcoin system capacity to process and record information that relates to the way transaction fees are being priced and charged. These are largely consistent also with Easley et al. (2019). One is that "miners are not only engaged into a hashing race, but they also strategically select transactions to process in order to grab the highest fees." Another is that the system requires congestion to generate fees. The third is that once block rewards are exhausted, the system can lead to concentration of market power as miners will rely solely on transaction fees to exist. This power concentration can lead to higher costs of transactions, and "may result in turn in a weakening of the system's safeguards against double-spending".  Lastly, "if all users pay the fee, the deviation to no fee is very costly, because it automatically puts the no fee transaction at the very end of the queue. This cost may be higher than the fee itself." In other words, in the "all users pay" environment, system congestion can lead to highly costly delays in processing of information.

User adoption: "Foley et al. (2019) fi nd that approximately one-quarter of bitcoin users are involved in illegal activity, which they estimate to represent 46% of bitcoin transactions. Based on their estimates, the illegal use of bitcoin generates approximately $76 billion of illegal activity per year. In terms of comparison, they note that the scale of the US and European markets for illegal drugs is only slightly larger! They do find that since 2016 the proportion of bitcoin activity associated with illegal trade has declined, but the absolute amount of activity (in USD) has continued to increase."

"One example of illegal activity that currently flourishes with Bitcoin is "ransomware" attacks in which criminals exploit vulnerabilities in computer networks to "lock" fi les so that the user cannot access them. As documented in an article in the New York Times by Nathaniel Popper, in 2019, more than 200,000 organizations submitted files that had been hacked in a ransomware attack. This was a 40 percent increase from the year before,"

The literature on the subject is "consistent with what we know about adoption by large merchants. According to the Economist magazine using data from Morgan Stanley, in 2018, only three of the largest 500 online retailers accept Bitcoin for payments", which is down from five such retailers accepting Bitcoin in 2017. "The conventional wisdom for the lack of adoption of Bitcoin as a payment system is that very few "legal" goods are purchased using Bitcoin because its value is not stable and the system is very slow in processing transactions."

User intent: "Most of the empirical research we discussed... suggest that currently, bitcoin demand is driven by speculation alongside likely illegal intent. A broader claim about bitcoin demand is that it is used as a hedge against inflation" (or as a form of 'digital gold'). The paper argues that BTC/USD pricing of July 2019 or something around USD9,630 per BTC would be consistent with all cryptocurrencies taken as whole replacing 100% of the privately held investment gold in the world for the gold price of USD 1,444 per ounce. As we say before running a Category V rapid... "Good luck on the down".

Pump and dump coins: "Hamrick et al. (2018) present compelling evidence of pervasive pump-and-dump schemes resulting from a systematic analysis of multiple datasets ... they identify more than 3,000 pump-and-dump schemes over a just 6 month period in 2018." 


14/2/21: COVID19 Update: Sweden and Nordics

Prior posts on COVID19 stats updates covered:

Lastly, let's run through comparatives for COVID19 dynamics in Sweden vis-a-vis the rest of the Nordics.



No matter how you define the Nordics:
  • As Sweden's closest land-linked neighbors of Finland and Norway (Nordics 1); or
  • Adding to the two above Estonia and Iceland (Nordics 2); or
  • Expanding the set to also include Netherlands and Denmark
there is only one conclusion than can be drawn from the above charts: Sweden is not doing too well in terms of cases recorded and in terms of deaths recorded through the pandemic so far.  Sweden's mortality rate per capita is substantially (86%) higher than that of the Nordics 3. 

Here is just how poor Sweden's performance has been:




14/2/21: COVID19 Update: U.S. vs EU27 comparatives

In previous posts, I covered the latest data for weekly Covid19 pandemic dynamics for:

  • Global data and trends: https://trueeconomics.blogspot.com/2021/02/14221-covid19-update-worldwide-data.html;
  • European & EU27 data and trends: https://trueeconomics.blogspot.com/2021/02/14221-covid19-update-europe-and-eu27.html; 
  • Data and trends for the most impacted countries and regions: https://trueeconomics.blogspot.com/2021/02/14221-covid19-update-most-impacted.html; and
  • Data on COVID19 dynamics in BRIICS countries: https://trueeconomics.blogspot.com/2021/02/14221-covid19-update-briics.html.
Now, as usual, EU27 (and Europe) comparatives to the U.S.

Start with new cases (weekly totals): 

Since the start of the pandemic, the U.S. has experienced three waves, against the EU27's two. The EU27's 2nd wave appears to have crested in week 45 of 2020, while the U.S.' current wave continued to rise until Week 1 of 2021. Over the last 8 weeks, US new cases exceeded those in the EU27 by 3,574,708 and population-size adjusted deaths by 29,150.

Next, weekly deaths:

The EU27's 2nd wave appears to have crested in week 48 of 2020 in terms of deaths, while the U.S.' current, third, wave continued to rise through week 3 of 2021. The EU27 weekly deaths counts show little signs of significant moderation since the Wave 2 peak, however, and are still running above Wave 1 peak.

Neither the U.S., nor the EU27 show any significant signs of deaths moderation that can be expected to occur in line with decline in new cases and vaccinations. This is surprising, because EU27 new cases moderated substantially since the peak of Wave 2.

Cumulated deaths per capita:


Since the start of Wave 2 in the EU27 (Wave 3 in the U.S.), EU27 deaths per capita have been converging with those in the U.S.

At the start of the EU27 Wave 2, U.S. total deaths per capita exceeded those in the EU27 by 87%. In week 5 of 2021, excess U.S. deaths compared to the EU27, cumulated over the period of pandemic stood at 96,595, or 108,1787 on the age-adjusted basis. 

In other words, U.S. cumulated deaths now exceed those in EU27 by 20.8 percent on population-size adjusted basis and by 23.3%. 

U.S. excess mortality compared to the EU27 and Europe, once we account for population differences is still rising:

In highly simplified terms, the U.S. pandemic experience has been associated with a cumulative excess mortality, compared to the EU27 and Europe of between 96,595 and 160,584 cases, respectively, based solely on differences in population sizes.

If older European and EU27 demographics are factored in, these excess U.S. deaths rise to 108,200 and 134,800, respectively.

I recently covered some new research on the policy-level failures in the U.S. during the COVID19 pandemic (see https://trueeconomics.blogspot.com/2021/02/3221-cost-of-trumps-failures-to-act-on.html). In simplified terms, the numbers above are shocking: were the U.S. to match policy responses in the EU27, we could have expected a death toll 96,600-108,200 lower than we currently observe. 

The U.S., however, managed much better than the EU27 in terms of deaths per case or the morbidity rate of the disease:


Overall new cases have become progressively less fatal through week 34 of 2020. This is most likely accounted for by improved and earlier diagnostics and treatments, as well as by increased share of infections detected in younger patients. These effects were exhausted around week 35 of 2020.

The 2nd wave of the pandemic in the EU27 was associated with a significant initial increase in severity. A smaller increase took place in the U.S. in the 3rd wave. Overall, the most recent wave of the pandemic saw relative uplift in the EU27 mortality rate, while the U.S. mortality rate continued to decline.

U.S. trend remains power-law, implying sustained decreases in mortality of new cases over time, while the EU27 trend has shifted toward a polynomial since Week 53 of 2020, implying rising risk of sustained increases in mortality.

In terms of the rate of change in weekly deaths: 


4-weeks average W/W rate of change in new cases, through Week 5 of 2021 was -20.7% in the  U.S. against -8.6% in the EU27.  4-weeks average W/W rate of change in deaths, through Week 5 of 2021 was -3.0% in the  U.S. against -1.9% in the EU27. 

A summary of the U.S.-EU27 comparatives:






14/2/21: COVID19 Update: BRIICS

 In previous posts, I covered the latest data for weekly Covid19 pandemic dynamics for:

Now, let's take a closer look at the pandemic dynamics in the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa).



In broadly defined terms, there is an ongoing decline in both new cases and new deaths over the last week across all BRIICS. That said, it is too early to call the peaking of the second wave of this pandemic in terms of deaths counts, since weekly counts remain extremely high and show only one week of sustained declines. The good news is that last week's declines were evident in all BRIICS. Another good news is that we now have at least four consecutive weeks of declines in new cases across the entire group, except for Indonesia, where we only have one week of declines, and China. 

A summary table:


14/2/21: COVID19 Update: Most impacted countries

 

Previous posts on the COVID19 update covered global numbers and trends (https://trueeconomics.blogspot.com/2021/02/14221-covid19-update-worldwide-data.html) and European & EU27 trends (https://trueeconomics.blogspot.com/2021/02/14221-covid19-update-europe-and-eu27.html).

Here are some comparatives across all countries with the highest rates of detected infections (> 5% of population):


Note: I highlighted countries with > 10 million population.

Another way of looking at this is to take countries with more than 250,000 confirmed cases, as presented in the next set of tables:



Comparing regions to the above countries:

And looking at the countries by population relatives:

The table above really drives home the depth of the crisis in Europe and the U.S. U.S. accounts so far fo 20 percent of global deaths, having just 4.3 percent of the global population. This gives the U.S. second worst ratio of its share of global deaths to its share of world population. Only the UK exceeds the U.S. in this horrific metric. The EU27 fall in the third place, below the U.S. with 21.4% of the world's deaths and 5.8% of the global population.