Crypto Week in Review (May 14, 2021)

Another cryptocurrency correction unfolded this week. It seems like the first two weeks of each month are bullish for cryptocurrencies, the last two weeks bearish.

This correction was accelerated by Elon Musk’s decision Wednesday to stop taking Bitcoin as payment for Teslas due to concerns about Bitcoin’s energy usage.

His decision and his concerns beg numerous questions: it’s bizarre that one of this planet’s smartest humans didn’t look through the entirety of the Bitcoin project before:

1. Investing $1.6 billion from Tesla’s treasury reserves into BTC, and
2. Carefully looking at the energy consumption (green) question, as Tesla gets benefits from the US for its green battery innovation

If we take at face value that Musk didn’t do his homework and “woke” up and decided to push back on the energy question ala Bill Maher, why isn’t he selling Tesla’s Bitcoin? The statement released with the decision not to allow BTC payments said specifically that they won’t be selling their Bitcoin.

Forgive the length of this note, but energy use in this very woke moment is of particular importance. What follows is a careful examination of the facts.

UNDERSTANDING THE FACTS ABOUT BITCOIN’S PROOF OF WORK MINING AND CARBON FOOTPRINT

Proof-of-Work

Proof-of-work (POW) is the protocol the Bitcoin network uses. At its essence, it is the security and the incentive structure of the network. It involves data and resources that must meet verifiable requirements that have been coded into Bitcoin’s existence from the very beginning.

It’s generally based on finding a solution to a complex algorithm through trial and error. Producing POW is difficult, but verifying it is simple.

POW incentivizes miners to support and secure the Bitcoin network by making it profitable to do so and making it unprofitable to attempt to hack the network. This process protects the network from malicious activity.

Mining and Bitcoin’s Carbon Footprint

• Bitcoin consumes a large amount of energy, yet it leaves a smaller carbon footprint than most estimates assume in the medium and long run because the amount of Bitcoin being mined decreases every four years while the chips used to mine Bitcoin get twice as efficient every two years (Moore’s Law)
• Energy consumed by the Bitcoin network is not wasted, rather it is used to power the most secure blockchain on the planet, expanding financial access and inclusion for billions of people, many of them unbanked
• This is enough of a social good to justify an expenditure of energy
• Bitcoin consumes 110 TwH of energy per year
• By comparison, here are other annual uses of energy:
• Physical bank branches and ATMs: 100 TwH
• Global consumption of YouTube videos: 600 TwH
• Video gameplay: 105 TwH
• Clothes dryers in the US alone (a single country): 94 TwH
• Idle home devices (electronics plugged in but inactive) in the US alone (a single country): 165 TwH

• The world consumes 160,000 TwH of energy each year
• An estimated 50,000 TwH (30%) is wasted (meaning unused or burned off)
• Bitcoin’s use of 110 TwH is around 7 bps (0.07%) of the entire energy used globally
• Or 25 bps (0.25%) of the amount of energy that is wasted

• Discussing the quantity of energy consumed by Bitcoin is just one part of the puzzle
• Understanding the type of energy that is consumed is essential for measuring Bitcoin’s carbon footprint
• To quote A Different View on Bitcoin’s Energy Consumption:
• “What makes Bitcoin mining unique is that it is truly location-agnostic.
• Miners, in fact, are financially incentivized to find inexpensive electricity sources, regardless of where they may be.
• As a result, Bitcoin mining naturally gravitates towards renewable energy; it is cheaper, has irregular patterns that can be arbitraged, and oftentimes has surpluses.
• Estimating the proportion of renewable energy powering Bitcoin is difficult, but one report claims 73% of the mining pool is carbon-neutral, while another suggests a figure closer to 39%.
• Either way, it is still an above-average proportion of renewables when compared with the composition of other technologies, countries, and organizations.”
• To quote Ross Stevens, Founder of NYDIG:
• “Since fossil fuels are already too expensive for Bitcoin mining, I think, confidently, the only long-term profitable Bitcoin mining will be powered by clean energy. […] From my perspective, beyond the revolution in monetary policy that Bitcoin already represents, Bitcoin also represents the biggest catalyst the world has ever known for the development of abundant, clean, cheap energy.”

Bitcoin may be a Solution to an Energy Problem

• There is a global energy problem known as curtailment, which is the loss of potentially useful energy due to the high costs and difficulty of transmitting electricity, among other reasons.
• Fun fact: the maximum distance electricity can travel is 300 miles
• In 2017, China curtailed 7.3 TwH of solar power, and the UK curtailed 1.5 TwH of wind power
• Once again, quoting A Different View on Bitcoin’s Energy Consumption:
• “While renewable energy is now less expensive than many other sources, this issue of curtailment has discouraged the build-out of new clean energy projects.
• Finding an efficient way to minimize curtailment could be the key to a carbon-neutral future.
• Bitcoin mining could play a big role in solving this problem by serving as an “energy buyer of last resort.”
• Curtailed renewable energy and energy sources far away from population centers now have a guaranteed and revenue-generating use: securing the Bitcoin network.
• Square and ARK Invest recently released a report on this topic, entitled “Bitcoin is Key to an Abundant, Clean Energy Future.”

MOVING ON

Away from the BTC/energy conversation, this past month has seen an acceleration in the price of ‘alt coins’, more specifically Ethereum and alternate blockchain projects. They have eaten into Bitcoin’s market dominance, which now stands at 40%, down from 70% in January. We attribute much of this move to the explosion in the Decentralized Finance (DeFi) space, which has grown from $15 billion to $65 billion so far this year.

Most of DeFi runs on the Ethereum blockchain. With the positives of protocol updates (Ethereum 2.0 and EIP 1559) potentially only months away from implementation, is it possible that cryptocurrency’s second-largest market cap token (Ether) could follow the 2017 Bitcoin path which saw Bitcoin rise from ~$1000 to $20,000? Ethereum started the year at $735…

In conclusion, BTC continues to follow the stock-to-flow model. As we have said many times, this 12-year-old asset class that is cryptocurrency has volatility, but not beyond the scope of many young technology investments (look at early charts of Amazon and Apple). Keep in mind that most of the outsized returns made over the past 20 years have been made in technology. We remain confident that Bitcoin is Gold 2.0, that it is the base layer of the entirety of the cryptosphere, and that it will continue to grow exponentially in users and price over time.

Buy the dip, stay the course. This is not financial advice.

Learn more: www.lebobtc.com