RockDen Advisors

Wealth advisory & investment management

Archives for October 2021

By

Bitcoin hashrate migrates to the US

Bitcoin hashrate migrates to the US with the share having doubled since April 2021 and reaching the #1 position globally. US share of bitcoin hashrate reached 34.5% in September, according to University of Cambridge because of China’s crypto mining ban. This geographic migration is important because US-based miners use far more renewable power than Chinese firms. The rising use of renewable energy should dent the “bitcoin is bad for the environment” attack vector. However, you should expect continued high energy prices to be a headwind for the bitcoin energy narrative. Governments continue to double down on their strategy to blame energy companies for spiking prices. It’ll be fascinating to watch the outcome of tightening investments further in carbon energy just as those prices head into unprecedented levels.

Bitcoin has rallied close to all-time highs due to speculation about the SEC approving a bitcoin ETF that is based on futures contracts. If true, will it be a genuinely positive catalyst or will it turn out to be over-hyped event signalling a market top? Will this speculation turn out to be accurate? Dispatch #33 has more thought below.

The full discussion subjects of The Dispatch #33 completed on October 15, 2021, follow:

  • US share of bitcoin hashpower reached #1, doubling to 34.5% from one quarter ago
  • Bitcoin ETF – genuine catalyst or macro-top indicator?
  • EU President doubles down to blame energy industry on high prices
  • “When you buy crypto you own nothing” + Jamie Dimon says bitcoin is worthless!
  • Former UK Finance Minister joins crypto firm
  • Property sales in China drop sharply in September

Bitcoin hashrate migrates to the US

The latest update by the respected Cambridge Bitcoin Electricity Consumption Index shows the US with #1 market share in bitcoin computing power (hashrate or hashpower). The share more than doubled from 16.8% in April to 34.5% in September 2021. Kazakhstan and Russia are the next largest share gainers, as bitcoin miners have left China (See Dispatch 21). This is a significant development, although wholly expected by The Dispatch, because it mitigates the  “bitcoin is bad for the environment” narrative. US-based bitcoin miners (who provide the hashpower) use a far higher percentage of renewable energy compared to China based miners.

To recap, over 60% of bitcoin hashpower (computing power securing the network) was previously located in China. This was a clear vulnerability for bitcoin because of China’s single party rule. Additionally, Chinese bitcoin miners used coal-based electricity during much of the dry season. The chart below shows the geographic evolution of hashrate until April 2021, which is when China stopped mining activity.  Since the last data points on the chart below, the US share has doubled. China’s share should be close to zero now.

Bitcoin hashrate migrates to the US – geographic hashrate share

Source: University of Cambridge

As The Dispatch has maintained, there’s no question that the bitcoin network uses energy. However, as the network moves increasingly to renewable sources of power that should dampen one of the key oppositions: that bitcoin harms the environment. The rate of change is startling as noted below.

Sustainable energy usage jumps as hashpower leaves China

The Bitcoin Mining Council, a forum of the largest bitcoin mining companies, published a 2Q survey that showed 67% of members’ power was from sustainable sources. The chart below from a Bitcoin Mining Council presentation shows the notable increase in sustainable energy use as China shutdown bitcoin mining, which was over 50% of bitcoin hashpower globally.

bitcoin network renewable energy use rises
Source: Bitcoin Mining Council

Source: Bitcoin Mining Council

The 10-slide presentation provides a positive spin on Bitcoin’s energy use, for anyone interested. This chart below is particularly provocative and not what’s highlighted by the media.

Source: Bitcoin Mining Council

The Dispatch looks forward to an independent entity like University of Cambridge publishing data on the Bitcoin network’s renewables usage.

“Sustainable” and “renewable” aren’t always what you might think they are

As this story about UK’s Drax wood pellet power plant illustrates, there’s plenty of wiggle room to become “renewable” and “sustainable.” The plant under discussion is a top-3 CO2 emitter in Europe and top-5 PM10 particulate matter emitter, but is deemed “sustainable” for burning wood pellets. This greenwashing risk is present in both national power grids and in bitcoin mining energy usage.

What does a bitcoin ETF launch mean?

Proshare bitcoin ETF launch

Bitcoin is experiencing renewed vigor as the market anticipates a bitcoin ETF launch as soon as next week. There are several ETF companies that have filed to launch futures-based bitcoin ETFs as discussed in this WSJ article. The more useful question is whether an ETF launch will signal a top or provide a positive catalyst. Close followers of crypto markets are aware that highly anticipated market events have turned out to be market-top signals. The CME futures launch in December 2017 and Coinbase IPO are two examples. Also, don’t forget that the SEC could object to these bitcoin ETFs next week.

What’s the difference between ETF approval vs. futures approval?

First, bitcoin is not at an all-time high and has not seen sharp price appreciation (by bitcoin standards) over the past several months. Instead, we’ve experienced volatility for sideways price movement. The price excitement in crypto assets has been in alt coins and not the more mature tokens. Second, an ETF is likely to increase consumer access to bitcoin. In contrast, CME futures started trading in 2017 when there was hardly any institutional participation. Futures are not a consumer offering, certainly not back in 2017. Here’s the WSJ’s take on what an ETF launch will mean for investors. Note, none of this is investment advice. Please speak to your advisor before investing.

For those enjoying the current price action, do keep in mind there are plenty of headwinds on the horizon. The White House is contemplating executive orders for crypto oversight, Bloomberg claims, which is most likely to target stablecoins. Updated FinCEN rules on crypto are expected before year end. Lastly, The Dispatch has repeatedly flagged the idiosyncratic risks posed by Tether reserve ambiguity. These are risks to the price short term. Taking a five-year view on this emerging asset should capture the upside provided by this highly volatile asset.   

EU doubles down on current policy despite price spike

European politicians are trying to spin the current energy price surge and blame producers. The tweet below from Ursula Van der Layen, the President of the EU Commission, is an excellent example. Economics 101 says that when you cut capital investment in a capital-intensive industry, supply will drop. When prices rise, it’ll take years for supply to rise, but even then, Van der Layen’s instinct is to vilify the industry and press on the renewables pedal cloaked behind “energy independence.” The transition will take decades because it takes time to deploy renewable generation and because renewable sources are less energy dense compared to fossil fuels. Her tweet feels somewhat like asking society that’s struggling to afford bread to eat cake!

Source: via Twitter

The tweet includes a 1-minute video clip that’s worth a listen but think critically of her words. Von der Leyen compares gas volumes not increasing to renewable prices not rising. Apples to oranges. The cost of producing gas hasn’t risen either. European energy companies have been coerced into not investing and now Europe is overly dependent on Russian gas. As for surging electricity prices, renewables will benefit from the same higher price if they are exposed to the spot market. It’s quite likely that much of the renewable energy is sold on long-term contracts where the price would not rise. This is just spin focused on fooling the population to cover up for policy decisions that led to the current energy price surge.

Political decisions are starting to shutdown energy funding

These political words carry over into the real world as this WSJ article lays out the scarce funding for energy projects now. The paragraph shown below highlights conditions.

Source: WSJ

Labor Department to change ERISA rule to comply with Biden executive order

For further evidence, this Department of Labor (DOL) action, illustrates how executive prose and action trickles into tangible actions. The DOL, which regulates employee retirement plans, proposed revisions to plan administrators to allow ESG factors in investing. The ERISA Act required a fiduciary duty from plan administration to focus on retirees’ financial wellbeing. On the surface, the DOL’s proposed changes appear sensible. Unfortunately, the politicization of these rules is well underway, having started during the Trump Administration, as this article explains. We are probably in the middle innings of this policy trend and prices will have to get much worse before there’s a change to the current thinking. They may well be decided at the ballot box with US mid-term elections thirteen months away.

Private equity flows into energy dry up

The chart below from the Private Equity Propels the Climate Crisis report by Private Equity Stakeholder Project illustrates the dramatic swing in energy deals. To be fair, the Kyoto Protocol was ratified in 2005, yet there was no change in capital allocation for many years, as the chart shows. However, the chart also shows how funding has tipped over in the past 2-3 years.

Source: Private Equity Propels the Climate Crisis

The chart also highlights how the same data can be used for different narratives. The Dispatch looks at the data and sees a worsening energy crisis. The report, on the other hand, is pushing the view that private equity is causing global warming. Both views have a point: private capital should have reallocated to renewable energy faster, but the aggressive shift today may cause higher prices in the future. This is just a simple view. In reality, solar and wind projects did not present attractive returns a decade ago due to higher costs and efficiency.

Falling capital flows into traditional energy is likely to lend momentum to sustained high energy prices. Yes, shutting off capital to carbon energy sources certainly slows the rate of increase in atmospheric carbon dioxide, but that may come with a growth slowdown as energy price impact everything we do.

Could political winds on energy flip quickly?

Despite all that’s highlighted above, the Politico headline shown below from a few days ago caught our attention.

Politicians are driven to stay in power. The view here remains that the headline is a set up to tell the voters that rising prices are the industry’s fault, Just as the EU tweet highlighted earlier. However, speech writing will only obfuscate voters for a short period of time and won’t overcome sustained high energy prices.

When you buy cryptocurrency you own nothing

This article was the top read last week on the wealth advisory industry site, Advisor Perspectives. This goes to show how many in the wealth advisory business dismiss digital assets. You’d expect a more nuanced and detailed presentation of facts by authors publishing on industry sites. Instead, you get this ending paragraph.  

The same can be said for a Picasso or a gold bar. All monetary assets rests on societal acceptance: it doesn’t matter if it’s real or digital. In fact, digital monetary assets have superior divisibility, portability & fungibility properties to gold. Also, what about the finance applications being built on blockchains like Ethereum or Polkadot? Isn’t that real value? The prevalence of these bearish views from mainstream finance illustrates that we are still early in the adoption of digital assets.  

Jamie Dimon thinks bitcoin is worthless

Staying on the subject of worthless bitcoin….JP Morgan CEO Jamie Dimon on Monday said, to paraphase “I personally think bitcoin is worthless… but if clients want access we’ll provide it”. Here’s a 21 second video of Dimon at the Institute of International Finance conference.

Crypto lobbying boost

Former UK Finance Minister – Chancellor of the Exchequer for any British readers here – has joined Custody firm Copper as an advisor. The Dispatch likes to flag this steady rise in the crypto industry’s lobbying capacity. This Decrypto article provides more details.

China property sales drop sharply in September

Source: WSJ

The sharp slowdown is worth following as it could have global implications down the road. President Xi is clearly working on changing the heavy reliance property to generate growth (See Dispatch 31), but it’s a tricky balancing act.

Once confidence is dented, it won’t be easy to recover. The Dispatch anticipates Chinese property prices staying soft in the coming months, increasing the chances of the government resorting to monetary stimulus to re-inject confidence into the sector. However, a notable easing is likely to lead to Chinese currency weakness, which won’t be accepted by Western trading partners in the current environment. This should be a slowly evolving stream of events worth following for its global implications.

Stay safe, enjoy fall and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.

By

Energy Policy and Future Supply Crunch

This week’s focus is energy policy and how it contributes to energy supply crunch. Simply put, we are attempting the clean energy transition by vilifying traditional sources of energy. This is leading to underinvestment that is likely to cause sustained higher prices to consumers. Despite The Dispatch wanting a cleaner, lower carbon future, it has placed significant bets on higher energy price in client portfolios. This includes nuclear, carbon reduction/credits and, where valuations make sense, renewable energy.

Digital asset markets are buoyant once again, and the media has several narratives to fit the price action. These include SEC possibly approving a bitcoin ETF based on futures contracts, speculation that bitcoin will become legal tender in Brazil and Bank of America publishing a report titled “Only the First Inning”.  

Discussion subjects of Dispatch #32 on 8 October 2021 follow:

  • Energy policy and structurally higher prices
  • Used car prices hit new all-time high. CPI moderation over?
  • Another software bug leads to $60m crypto value loss
  • Crypto exchanges restrict access to Chinese residents
  • Bitcoin/crypto disrupting global money transfer market
  • Bank of America Digital Asset Primer – “Too large to ignore”
  • Tether allegations recycled on Bloomberg Businessweek cover story

Unrealistic energy policy and future energy supply crunch

The misguided policies are illustrated by President Biden’s statement that the US power sector will be free of carbon by 2025.

Interestingly, the video clip is no longer available on The Hill tweet, but The Dispatch did watch it several times (when the video was first released) and heard the President say “power sector will be free of carbon.” Even a 5th grader shown the current total energy mix will realize that carbon free by 2025 is merely a dream. The EIA estimates that 60% of electricity is generated from fossil fuel sources, less than the total energy mix shown below, but still very high.

Source: EIA 2021 outlook

The government’s Energy Information Administration (EIA) projects that we’ll consume more carbon energy and much more renewable energy in the future. For a more detailed discussion about how current energy policy is likely to exacerbate prices read this post by respected commodity investors Goehring & Rozencwajg.

An aggressive switch to renewables may require lower energy consumption & lower growth to avoid energy supply crunch

We could sharply lower the consumption of carbon energy, but that’ll come with slower growth, which no politician is willing to accept. Instead, all we ever hear is the demand to stimulate consumption at all costs. Monetary policy via the Fed is pushed to print money and the federal government increase spending and transfers to boost aggregate demand. More consumption = more energy use. We have no other growth model than higher consumption driving higher GDP. The world needs to have an honest discussion about the trade off, but we won’t do so as partisan politics dominate. 

Energy transition needs to be balanced and well planned

Germany and England are good examples of sharply higher energy costs from a faster transition to renewables. Both countries rely on renewables for a larger portion of their electricity needs and that has led to sharply higher energy prices. The intermittence of renewable power generation and energy density are two factors that need to be considered.

The two charts below from this WSJ story illustrate the long-term wholesale electricity price in each of those two countries. They are up by a factor or 2-3x before the most recent surge.

The electricity price spike is partly driven by gas prices that have surged multiples more, as seen in this chart below.

Source: WSJ

US energy prices are also spiking

The US hasn’t experienced as severe a price spike, but winter heating bills should be notably higher this year following higher energy prices.  Here’s a chart of the US natural gas prices from this recent WSJ article

The Dispatch is a supporter of the switch to greener energy, but our politicians need to highlight the potential consequences of this acceleration. The burden of higher energy costs is greatest on the lower 50% of income earners.

Betting on sustained high prices as energy supply crunch worsens

The Dispatch remain notably skewed to higher energy prices in client portfolio. This does not mean purely oil and gas value chain. There’s ignored-for-decades nuclear, the carbon reduction/credit value chain and a handful of alternative energy assets that aren’t valued like SaaS companies like Adobe or Salesforce. This is NOT investment advice.

Shortages are widespread in physical commodities, not just energy

The diversified Bloomberg Commodity Index is hitting all time highs because the same dynamics of underinvestment in energy was also a feature in most commodities. This is going to be a substantial source of future inflationary pressure, even though governments and policy makers ignore food and energy costs when setting monetary policy. Politicians will act once the voters are unhappy. Watch activity in Europe to see if/how the debate changes.  

Source: via Twitter

Energy accounts for 30% of the above index weight, grains ~23%, industrial metal ~15% and precious metals 19%. Full details here.

Another Crypto software hiccup leads to value dilution

Compound, one of the largest Defi venues, gave away $80m worth of compound tokens to users due to a software flaw, as Coindesk explains. This is a loss to all the other holders of the Compound token as it dilutes their interest, just like a company issuing new shares. It is not the typical crypto hack where value is stolen directly from individuals by sophisticated software programmers. The initial flaw in the protocol software gave out too many tokens to some users. Since the discovery of the initial bug, additional flaws have been reported. This second heist appears to be actioned by sophisticated programmers. It is eye opening that one of the largest Defi protocols had a software bug. This is another data point guiding The Dispatch on digital asset allocation: The largest positions are matched to the most secure protocols, all else equal.

Used car prices reversed to record high

In July’s Dispatch #23, we articulated that inflation is likely to stays elevated over the long-term, as surging house price feed through into the CPI’s “shelter index”.  We did see the possibility of inflation easing in the short term as transitory items like used car and airfare prices ease. The short-term view is likely to be fleeting as used car prices have hit a new all-time high after a brief decline. With the worst of the Delta variant behind, lodging and airfare could also rise. The Dispatch now does not anticipate easing inflation in the next one or two quarters and sees high inflation challenging the Fed’s transitory narrative.

Source: Manheim

Crypto exchange starts offboarding Chinese users

This story follows up on China’s more comprehensive anti-crypto measures announced a few weeks ago (see Dispatch #31). Many exchanges have started restricting new Chinese users and plan to offboard existing Mainland clients. US users are familiar with such restrictions as most offshore exchanges restrict them. Chinese users are now feeling those same restrictions, but without having access to any onshore services. The most sophisticated of Chinese users could trade on Defi venues where there is no centralized authority stopping Chinese users. Using Defi venues will require working around the China firewall. Let’s be clear, though, excluding the Chinese population from crypto assets is a negative to the sector. These articles from  Coindesk and WSJ discuss the measures announced by exchanges.

Bitcoin starts to disruption global money transfer industry

Bitcoin/crypto’s ability to disrupt the global money transfer industry might be coming to fruition. The World Bank World Bank estimates 2020 global remittances of $700bn, and it is an industry littered with high fees.

Until now, the efficiency of the bitcoin value transfer technology hasn’t been well advertised, because all the attention has been on bitcoin the asset. That is changing with El Salvador adopting bitcoin and rolling out a national bitcoin wallet.  The country received ~ $6bn from remittances in 2020, which is nearly 25% of GDP this CNBC article explains.

Rapid Chivo wallet adoption and rising financial inclusion

This first tweets from President Bukele illustrates the explosive adoption and rising financial inclusion. That’s a one third of the population using the wallet!

Source: via Twitter

The tweet below highlights the disruptive pace. At $2m/day that’s in the vicinity of $600m/yr (assuming just 300 days), which is a 10% of 2020’s transfers into El Salvador. And, this is just one month post the launch of the Chivo wallet, which was marred by technical glitches.

Source: via Twitter

Money transfer companies take anywhere from 5-10% of transfer amount are most at risk. Just to be clear, the lightning payment system is merely using bitcoin’s payment mechanism to move US$.  The participants don’t have to take bitcoin price volatility, as the founder of Strike explains in this CNBC interview.

Money transfer company shares may be pricing in the crypto risk

The chart below of Western Union stock shows the weak performance since bitcoin became legal tender in El Salvador. A one-year stock price chart does not provide definite conclusions in the Dispatch’s view, but it’s worth following. Thank you to reader Frank D for flagging the WU move.

Source: Tradingview

Tether allegations make Bloomberg Businessweek cover story

Regular readers of The Dispatch know that we see this stablecoin as the most serious risks to the crypto ecosystem. On July 23rd Dispatch #24 laid out the allegations and the risks of Tether. There’s nothing new in this Bloomberg article that has not been alleged many months previously. It is, however, a well packaged summary of all the allegation with the Bloomberg’s substantial reach. It’s good that a wider audience is aware of the allegation. @BennettTomlin on twitter remains the authority on Tether allegations, in The Dispatch’s view. Follow Mr. Tomlin as he’ll flag any new worries while the Bloomberg reporter would have moved onto the next story in a few weeks.

BofA on digital assets – “only in the first inning” and “too large to ignore”

Despite the headline, the report is not a digital asset primer at all. Instead, it just provides a summary of digital asset exposure of legacy stocks under BofA coverage. The Dispatch, with several decades of institutional equities insights, is skeptical of banks’ digital asset research. They are helmed by overworked analyst trying get up to speed on a new technology and asset in months, which is reach. This report is evidence of the effort to purely drive value into their legacy stock coverage. There’s hardly a dusting of digital asset insights. It’s laughable to see these FOMO research efforts from banks that bashed digital assets for years. FOMO = Fear of Missing Out.

Stay safe, enjoy cooler temperatures and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.