This week in the newsletter we write about BlackRock’s 2% Bitcoin allocation recommendation, why Google’s new quantum chip is not a threat to cryptography, and two major NFT collections releasing fungible tokens.

Subscribe here and receive Galaxy's Weekly Top Stories, and more, directly to your inbox.

2% portfolio allocation to Bitcoin is “reasonable”

Blackrock recommends up to 2% allocation to Bitcoin. In an Investment Perspectives note published on Thursday, Blackrock wrote that they think that a 1-2% allocation is "a reasonable range" for a bitcoin exposure" for multi-asset portfolios. The report authors likened the allocation sizing to traditional 60/40 portfolios' exposure to the "magnificent 7" group of mega-cap tech stocks (i.e., Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla). However, they cautioned going beyond the 2% level as it would sharply increase bitcoin's share of the overall portfolio mix. "Even though Bitcoin’s correlation to other assets is relatively low, it’s more volatile, making its effect on total risk contribution similar overall."

The report noted that wider institutional adoption could dampen some of Bitcoin’s volatility, which would allow for higher allocation levels to the asset. Yet, the lower volatility could also dampen the potential for sizable price increases. “Looking ahead, should bitcoin indeed achieve broad adoption, it could potentially also become less risky – but at that point, it might no longer have a structural catalyst for further sizable price rises. The case for a long-term holding may then be less clear-cut and investors may prefer to use it tactically to hedge against specific risks, similar to gold,” they wrote.

OUR TAKE

One week after breaking $100k, the world's largest asset manager (with over $11.5T in AUM) is telling clients that up to 2% allocation to bitcoin is "reasonable". In the past, Blackrock has highlighted bitcoin's benefits as a portfolio diversifier but this is the first time that the firm has explicitly commented on a specific allocation level to bitcoin (at least to our knowledge). ETFs have no doubt played an important part in pushing bitcoin above the milestone mark as they have attracted $35bn of cumulative net inflows and now collectively hold 1.14m BTC (~5.7% of total minted supply). If the ~$50T AUM in the US wealth management market were to allocate 2% to bitcoin via the ETFs, that would suggest $1 trillion of inflows…

Blackrock's sign-off should also improve bitcoin's adoption rate by corporates and governments / sovereign states, which have been mulling the investment decision more frequently as of late. After onboarding this new wave of first-time bitcoin investors, the next goal should then be to convert them into bitcoin proponents who understand and care about the tech. - Charles Yu

Google’s Willow Quantum Processor Sparks Discussion of Blockchain Security

Google's announcement of its new quantum chip, Willow, has re-sparked debates around blockchain security and the robustness of their encryption methods, specifically in the context of Bitcoin. On December 9, the founder of Google Quantum AI, Hartmut Neven, revealed that their latest quantum processor achieved two groundbreaking milestones. The chip performed a benchmark computation in under five minutes that would take today's most powerful supercomputers 10 septillion years to complete. The benchmark computation used to arrive at this figure, which was to produce a random distribution, has received some criticism as its result has no practical use, however. More significantly, Willow demonstrated the first-ever "below threshold" quantum error correction, meaning it can reduce errors exponentially as more qubits are added to the system. This 105-qubit chip, fabricated in Google's specialized Santa Barbara facility, represents the first convincing prototype of a scalable logical qubit, with quantum information retention times approaching 100 microseconds – five times longer than their previous generation of processors.

Willow is the fifth quantum chip released by Google since 2017. With 105 qubits, Willow packs 50% more quantum processing power than its previous 70-qubit Sycamore 2 chip.

OUR TAKE

Quantum computers pose a threat to blockchain security because they can hypothetically leverage quantum methods like Shor's and Grover's approaches to break the cryptographic systems (like RSA and elliptic curve cryptography) that secure blockchain transactions and the assets on them. A sufficiently powerful quantum computer could theoretically derive private keys from public keys and allow for double spending, compromising the fundamental security model that cryptocurrencies and other blockchain applications rely on.

As it currently stands, Willow, and quantum computing broadly, pose no imminent threat to blockchain security or the encryption methods they leverage. The most aggressive estimates suggest quantum computing is somewhere between 10 and 20 years away from achieving the capabilities necessary to crack the encryption and security methods used by blockchains. Notably, the cryptography used by Bitcoin and most major blockchains is mainstream cryptography that is widely used across finance, corporates, and governments for storing secrets, so it’s not just Bitcoin that is at risk from quantum computing — it’s everything.

In the case of Bitcoin, the network relies on two types of encryptions: 1) ECDSA 256, which secures addresses and signs transactions through public/private key pairs, and 2) SHA-256, which enables miners to hash and add blocks to the network through proof-of-work. ECDSA 256 is vulnerable to Shor's algorithm, which could allow quantum computers to derive private keys from public ones, making user assets vulnerable. However, this would require over 1,000,000 qubits of quantum processing power, which is 9,523.8x Willow's power. SHA-256 is vulnerable to Grover's algorithm, which could accelerate the mining process by helping quantum computers find hash collisions more quickly than conventional supercomputers. Grover's approach would effectively cut the security strength of cryptographic hashes in half - meaning a 256-bit hash would only provide 128 bits of quantum security. However, this is generally considered a less severe threat than Shor's algorithm, since the solution is relatively straightforward: doubling the hash length would restore the pre-quantum security level, whereas defending against Shor's algorithm requires fundamentally different cryptographic approaches.

While quantum computing poses no immediate risk to blockchains, potential vulnerabilities could emerge during these networks' lifespans. As quantum technology advances, blockchain protocols will likely implement quantum-resistant features. Even Bitcoin, despite its conservative upgrade culture and high barriers to protocol changes, would likely achieve developer consensus for implementing quantum security measures if such protections became necessary. - Zack Pokorny

NFT Collection Tokens are Here

Two prominent NFT collections, Pudgy Penguins and Milady Makers, ranked second and eighth by market cap respectively, are expanding into fungible tokens. Pudgy Penguins announced on December 5, 2024, the upcoming launch of their ecosystem token $PENGU on Solana, scheduled for distribution in December 2024. The token will have a total supply of 88bn, with 25.9% allocated to the community and 29.28% reserved for the company and team. Since this announcement, Pudgy Penguins' floor price surged over 76% to cross $100,000 on December 12, 2024, while Lil Pudgys experienced a 96% increase.

Meanwhile, Milady Makers followed suit by airdropping their community token $CULT to holders three days after the Pudgy Penguins announcement. $CULT had previously done a $20m capped ICO in June 2024, reserving additional tokens for future distribution. Since the airdrop, Milady's floor price has increased by 20%.

OUR TAKE:

The integration of community tokens into NFT collections represents a pivotal development in the NFT ecosystem. By introducing these fungible tokens, projects can now offer additional rewards to holders while creating new speculative opportunities. The market's positive reception of this development is evident in the recent performance of Pudgy Penguins and Lil Pudgys, which have surged 77% and 92% respectively over the past week, demonstrating that collectors view these token allocations as a bullish catalyst.

This trend emerges as the NFT market shows strong signs of recovery from one of its most severe downturns. Since November 2024, weekly trading volume has rebounded to $172m, breaking above $100m for the first time since May 2024. While tier 1 NFT collections remain 60%-80% below their all-time highs, their floor prices are undergoing a revaluation as crypto enters a bull market. Community tokens are positioned to become a primary driver of NFT speculation moving forward. Although the long-term impact of these tokens on project sustainability remains uncertain, they represent a strategic response to growing competition from memecoins. By offering fungible tokens, NFT projects now provide speculators an entry point without requiring the purchase of entire NFTs, potentially expanding their market appeal. - Gabe Parker

Charts of the Week

Solana’s newest validator client upgrade from Anza, Agave 2.0, introduced partitioned epoch rewards. This feature, which was activated at the start of epoch 707, addresses network performance degradation around the times of staking reward distribution. Before Agave 2.0 Solana distributed all rewards in a single block at the beginning of each epoch. The growing number of active stake accounts, and in turn the number of rewards payouts, has led to performance challenges on the network around these times, however. The new approach spreads reward distribution across multiple blocks at the start of each epoch with the intention of improving efficiency and minimizing network congestion as rewards are distributed to stake and vote accounts.

Solana has seen early signs of improvement in network performance as a result of the Agave v2.0 upgrade in the four epochs that have passed since the activation of partitioned rewards. To measure the improvement, we can look at the number of skipped slots at the beginning of each epoch, which can occur when the network and validators are under increased stress; in some cases, this source of stress can come from rewards payouts. The network experienced an average skip rate of 42.4% over the first 101 blocks of the 56 epochs leading into the activation of partitioned rewards payouts. In the four epochs that have taken place since the activation, however, the network has seen an average skip rate of just 17.8%. The lower skip rate can improve the user experience on the network by lowering transaction landing times and, possibly, keeping fees lower and more consistent.

Other News

• Michael Saylor advocates for US dumping gold in favor of buying 5 million bitcoin

• Vancouver City Council passes bill Mull Accepting Bitcoin for Taxes, Reserve Strategy

• Binance and Circle collaborate to boost USDC adoption and improve financial services ecosystem

• Publicly traded bitcoin miner MARA buys $1.1 billion in BTC

• Binance CEO Richard Teng says it's too soon to discuss return to US

• Economist Peter Schiff suggests selling federally held bitcoin to reduce the budget deficit

• Riot Platforms aims to raise $500 million to buy more bitcoin