In the pursuit of the cheapest electricity, mining investors tend to deploy capital in locations where electricity is produced
The week in Crypto
The market’s second significant market correction in 2021 is underway, with prices selling off 26% from the current all-time high of ~$58,300 and at the time of writing recovering from the correction low of ~$43,000. As a sign of just how hot the crypto markets are getting, the initial phase of this correction represented the largest single liquidation event the market has experienced, with ~$6 billion of value wiped out of leveraged traders accounts over the course of 2 trading sessions. With many momentum indicators, funding rates, and on-chain metrics somewhat resetting and cooling off as a result of this latest (expected) parabolic correction, the cyclical market event of digital assets, led by Bitcoin, moving from weak hands to stronger hands appears to have completed with prices at the start of this week moving back towards $50k and a USD trillion market capitalization. History rarely repeats, but it often rhymes, and if 2017’s bull market is anything to go by, then we are in line to expect another leg up in the coming weeks with subsequent ~30% drawdowns as we head towards $100k and beyond.
The above chart, courtesy of @bloqport, shows the 6 parabolic corrections of the 2017 bull market, with pullbacks ranging from -29% to -38%, all followed by a minimum of a 100% price increase once the correction has been completed and after the transfer of assets from weak to stronger hands has concluded.
As the bond market sells off this week and pushes longer-dated Treasury yields to levels not seen in over a year, volatility across all markets has seen an uptick. We note that in an interview yesterday on Bloomberg, JPM CEO Jamie Diamond reiterated his stance on 10-year Treasury, insofar as that the bank would not be buying any and would not be recommending clients to buy any. As the Democrats successfully pass a $1.9 trillion stimulus plan and pledge to send out $1,400 per person (subject to wage brackets), the bond market is signaling the warning sign that inflation is coming if not here already, albeit being masked by manipulated CPI formulae. There is a general market expectation that the Fed’s policies will accelerate inflation so that the ridiculous debt burden is reduced and ‘’soft defaulted’’ away. This has led to the sell-off in longer-dated bonds as holders rush for the exit in fear of the erosive inflationary factors that are building up in the market. The main question on everyone’s lips is whether Central Banks will start to implement yield curve control — more on this next week.
Bitcoin is becoming a central figure in this emerging macro inflationary equation with institutional investors seeking relative safety in scarcity and other inflation protection hedges. With gold down ~6% in the past week and Bitcoin largely unchanged, at a simple glance (and although there are many more factors at play here), it shows that Bitcoin’s allure is currently stronger in the current market turmoil and has been for 6+ months as BTC continues to chip away at Gold’s market share as a store of value. The below chart shows the returns of the two stores of value since the start of the year.
The week would not be complete without a healthy dose of negativity and FUD. Fresh off the back of a successful $18.5m settlement of the NYAG Vs. iFinex case that has dragged on for 2 years, the NYAG has been offering the market advice on crypto. In a rather odd stance from the legal institution, which in our opinion smacks of frustration in not being able to officially charge Tether and Bitfinex, Letitia James advised all New Yorkers that investing in the world’s most successful asset class of the last 10 years was not a wise move.
We find the continuing contrast of professional opinions quite extraordinary as just this week, two of the USA’s largest financial institutions released research reports backing the utility and investment case for Bitcoin and some other digital assets.
Citi’s 108-page report here
Fidelity Head of Global Macro comments here
Select extracts from Citi’s report
There are a host of risks and obstacles that stand in the way of Bitcoin progress. But weighing these potential hurdles against the opportunities leads to the conclusion that Bitcoin is at a tipping point and we could be at the start of massive transformation of cryptocurrency into the mainstream.
To these businesses, Bitcoin is the ‘North Star’ that points the way and its success is seen as a barometer of interest in the overall on-chain ecosystem.
In this scenario, Bitcoin may be optimally positioned to become the preferred currency for global trade. It is immune from both fiscal and monetary policy, avoids the need for cross-border foreign exchange (FX) transactions, enables near instantaneous payments, and eliminates concerns about defaults or cancellations as the coins must be in the payer’s wallet before the transaction is initiated.
It’s clear that the institutional private sector is increasing its acceptance and adoption of Bitcoin and the crypto industry, but the US Government and departments such as the NYAG are still clinging to false narratives and intellectually weak opinions. This divergence of viewpoints will continue to play out until the final skeptics capitulate and accept Bitcoin and likely signify the top in the market.
Bitcoin isn’t Boiling the Oceans
From a closed group of cypherpunks on the Bitcoin mailing list in 2008 to a global phenomenon with over ~100m users, Bitcoin has grown from less than $1 per coin to trading in billions of USD in daily liquidity at over $50,000 per coin. Naturally, as demand grows, so do the voices of the antagonists, such as the NYAG, who are stuck in their legacy way of thinking when considering the future of money. With the recent price appreciation and with Bitcoin (and Ethereum) hash rate reaching new highs (as seen in the below chart), the demand for Bitcoin is indisputable.
So too is the energy consumption of the growing network of global miners who compete for the block reward and transaction fees via the Proof-of-Work SHA256 cryptographic hashing algorithm. Miners are fundamental to providing the Bitcoin protocol with its ingenious network security, which facilitates trillions of dollars of value to move around the world without relying on centralized ledgers held at banks and to date transferring trillions of USD worth of value without fault or error.
We have noted that the environmental concerns of Bitcoin’s energy consumption are doing the rounds again within mainstream media, and although we have addressed this concern before (not surprisingly during the June 2019 price rally to $14k), it is worth updating our current thoughts regarding this subject.
Like many goods that are made, production is not uniform across the planet and tends to aggregate around locations that provide favorable conditions to produce the goods. This applies to production of power, for example, nuclear and coal power stations are typically situated near rivers, lakes and oceans so they can rely on the water to provide the cooling required in the production of electricity. Bitcoin mining requires an abundance of cheap electricity to maximize production efficiency, with the price per unit electricity being one of the most important inputs in determining if a mining facility is competitive and financially viable. Therefore, investors scour the world for pockets of cheap electricity to deploy their hardware. What many skeptics fail to acknowledge is that 1) the storage and transfer of electricity is very inefficient and 2) power is generated where these favorable environmental conditions occur. Consequently, in the pursuit of the cheapest electricity, mining investors tend to deploy capital in locations where electricity is produced. But due to the existence of remote and unpopulated production sites (wind farm, hydro dams, geothermal), the costs of storage and transfer to where the power can be consumed can be prohibitive, and as a result any surplus electricity that is generated is extremely cheap as the alternative is to simply waste it.
Despite the headlines, it is the free(ish) market demand for Bitcoin that creates the market price and thus increases the energy footprint of the protocol. This directly contradicts the blame that is often levelled at Bitcoin and Bitcoiners. Skeptics too often ignore the actual market conditions that make Bitcoin so desirable and in demand. These critics of Bitcoin may benefit from looking beyond blaming the technology and question why the Bitcoin protocol and other cryptocurrencies were invented, built, and released to the world in the first place. If there wasn’t real-world demand from millions of people, then there would be no energy consumption and the plethora of reasons that sit behind the demand that is the cause of this energy consumption.
It is true that the current energy consumption of the entire Bitcoin network can indeed be compared to that of the entire energy consumption of The Netherlands however this statement lacks crucial nuance and understanding of the mining industry as outlined above. The above argument is just one of the most prominent counter points to the ‘’Bitcoin is boiling the oceans’’ dispute that arises every time the price of Bitcoin and its associated hash rate hits all-time highs.
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