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.
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?
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
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. |
