A Good Week for Digital Assets
In light of the recent move by Tesla to convert $1.5 billion of its balance sheet into bitcoin, we thought it would be appropriate to dive into one of the most cited reasons for bitcoins failure, its energy consumption. We will explore some of the reasons why it is necessary and why someone who has dedicated their life to the creation of clean, renewable energy and a reduction in fossil fuel use has invested in something considered at face value, so damaging to the environment.
Firstly, we must realise and accept that Bitcoin does consume a vast amount of electricity. According to the Cambridge Bitcoin Electricity Consumption Index, it is around 121.05 TWh per year. To put this in perspective, the Bitcoin network's energy consumption sits between the countries of Argentina and Norway. This immense amount of energy is necessary though, as it is directly tied to the network's security. The Bitcoin blockchain uses a consensus system called Proof of Work; in short, this requires thousands of computers spread across the globe to reconcile and verify every transaction taking place on the network by finding a cryptographic key. It is exceptionally computationally exhaustive to find this key and the more people competing to find it, the more secure the Bitcoin network becomes. However, all these computers require electricity. Therefore one can infer increases in energy consumption = greater security for the overall network.
The above explains why the more energy expended on the system creates a more robust and secure network. However, why should this energy be expended in the first place? For this, we will allude to the argument made by Ross Stevens, the CEO of Stone Ridge Asset Management. He begins with a basic principle: Bitcoin is a better technology for performing central banking than the current government monopolies on central banking. Humans have naturally gravitated towards the most efficient, or best form of technology throughout history even if they may be more energy-consuming or intensive. Horses use less energy than cars, Thomas Edison's lightbulb won out over the candle, and computers replaced typewriters. These technologies all consume more energy than its predecessor; however, they all offered unique benefits and efficiencies to the end-users. Is it so audacious to think that a new, better monetary system will succeed even though it consumes more energy than its predecessor? In Nic Carter's words, "Ultimately, it's just a matter of opinion as to whether the existence of a non-state, synthetic monetary commodity is a good idea."
The second point he makes is how this plays out practically: Bitcoin mining is the only profitable use of energy in human history that does not need to be located near human settlement to operate. The biggest problem that we humans have with energy is not the fact that it is hard to produce, but rather electricity is expensive to transport. As electricity leaves its point of origin, it begins to decay and therefore becomes costly and impractical to transport over long distances. That is why we currently have grid systems near highly populated areas. We have been forced to live near these centres of energy production unless we have a means of producing power for ourselves in a cost-effective manner. As technology has improved and we leverage inventions like satellites and wireless internet connections we can now mine bitcoin anywhere in the world. The most exciting implication of this is isolated settlements that have an abundance of natural resources like flowing water, or geothermal hot spots can now monetise these and use excess capacity to encourage further growth in that area. Bitcoin can fundamentally change electricity's economics by creating an exceptionally profitable use of location independent, sustainable electricity, something we have never seen before.
The outcome is that we may see humans congregating in remote areas around cheap, clean, sustainable energy sources with an exceptionally low marginal cost of production all driven by bitcoin infrastructure. To quote Ross, "Historically, our energy challenge has been to move the power to the people. With Bitcoin, we can move the people to the power."
How do we know that this is an eventuality? Well, we have already seen it happening across the globe. If you look at mining operations around the world, the majority is already done with renewable energy. In 2019, CoinShares, the digital asset research and management firm, found that 73% of all Bitcoin mining was done with renewable energy. If you look at China, where some of the world's biggest mining firms are located, that number goes up to almost 82%. But why would a country that is well known to be the worlds largest consumer of fossil fuel carry out the majority of its mining using renewable energy? Well, that comes down to the fact that there is massive overcapacity within their hydroelectric energy system. They don't have the infrastructure or grid system to transfer it where needed, so instead of wasting it, they have directed the excess power to mining bitcoin. This opens up the possibilities for the model to be replicated elsewhere and show how you can now have a profitable use of location independent electricity. Imagine the possibilities.
This is what we believe Tesla and Elon saw in Bitcoin. The chance to create a world that is further incentivised to create renewable, cheap, clean energy, no matter where you are. Ultimately, Bitcoin may not be the answer to just the questions that plague our current monetary system, but also serve as a catalyst in solving the issue of climate change and creating a more sustainable future for all.
Notable Articles and News Stories This Week:
First Canadian Bitcoin ETF Approved by Securities Regulator
This week the Ontario Securities Commission approved the first bitcoin ETF in North America. It will provide expose to the asset BTC and track its returns. ETF's can hold a basket of assets similar to a mutual fund but trade on open exchanges similar to how stocks do. This marks a significant step forwarded for bitcoin as regulators have rejected many ETF proposals in the past. It also signals that this asset class is maturing and is now considered 'safe' enough by regulators to offer to the general public. Bloomberg analyst Eric Balchunas believes that this move is a good sign that an American bitcoin ETF may follow soon.
Read the announcement here
Mastercard Will Let Merchants Accept Payments in Crypto This Year
This week Mastercard announced that it would give merchants the option to receive payments in digital assets. This approach is very different from other large payment firms as it will allow merchants to accept payment in crypto as opposed to fiat currency directly. Most previous payment providers have given customers the option to pay with their digital assets, but they are converted to fiat before landing in the merchant's account. This signals a move towards broader digital assets adoption and their more general acceptance by people who want to transact with them.
Read more about the announcement here
Bill Miller’s Flagship Fund May Now Buy GBTC to Gain Bitcoin Exposure of Up to 15%
The legendary fund manager Bill Miller has announced that his flagship fund the Miller Opportunity Trust may invest up to 15% of its $2.25 billion in bitcoin. Bill is a proponent of bitcoin and has previously laid out his investment thesis and explained why he believes it to be an asset that deserves a place in a diversified portfolio. We are seeing an uptick in institutional allocation to the asset class. It will be interesting to see how it progresses, especially considering Teslas' recent conversion of a portion of its balance sheet to bitcoin.
Read about his decision here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.