Insights, news and analysis for the professional investor |
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Bitcoin (BTC) - $29,203.16 |
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Prices as of 5/20/22 @ 8:56 p.m. UTC Was this newsletter forwarded to you? Sign up here. |
Welcome to Crypto Long & Short After a handful of newsletters in a row about other unimportant stuff, it’s about that time. Back to Bitcoin. Thank our lucky stars, last week was relatively quiet from a market perspective. Bitcoin’s price did that zigzag thing between $28,500 - $31,000, and nothing blew up. Following last week’s mayhem, the stability was much welcomed. What did happen last week was an update to the heavily cited (and rightfully so) Cambridge Bitcoin Electricity Consumption Index (CBECI) provided by Cambridge University’s Cambridge Centre for Alternative Finance (CCAF), which in part looks to uncover and share the geographic location breakdown of bitcoin miners globally. The previous Cambridge update showed that China’s share of mining went from 34.3% in June 2021 to 0.0% in July 2021 following a crypto mining ban in the country. Last week’s update showed that China’s share of mining went from 0.0% in August 2021 to … 22.3% in September 2021. Clearly something is up here, so let’s dive in. While we are there, we’ll also touch on two other bitcoin mining related topics: 1) hashprice and 2) mining company woes. That (and maybe more …) below. – George Kaloudis |
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Perhaps it’s not obvious so I’ll say it: That didn’t happen. Moving mining operations isn’t exactly easy. The bulk of mining operations isn't a handful of hobbyists messing around; Bitcoin has long since graduated from that. Most miners are more properly characterized as commercial operations, paying triple net leases for warehouse space and depending on fancy power purchase agreements for electricity.
Bitcoin mining operations look like this (check out this amazing photojournalism effort from my colleagues):
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Inside HIVE's mining farm in Sweden (Sandali Handagama/CoinDesk) The reason the data looks like this is due to the data collection method employed by the CCAF. The CCAF partnered with bitcoin mining pools to collect geolocational mining facility data based on IP addresses (pools allow a lot of different miners to contribute to mining, and the reward is then split among them according to their processing contribution to smooth out individual miner income). Therein lies the issue and the CCAF warns as much, stating: It is no secret in the industry that [miners] in certain locations use virtual private networks (VPNs) or proxy services to hide their IP addresses in order to obfuscate their location. Such behaviour may distort the sample and result in an overestimation (or underestimation) of hashrate in some provinces or countries. So the real story of what I think happened here is actually quite boring. - Chinese miners were afraid that the government crackdown was serious, so they lied or spoofed their location data and moved underground.
- After some time, Chinese miners realized, “Hey, this doesn’t seem that scary,” so they felt comfortable sharing their real data.
That’s it. Like I suggested: actually quite boring. That’s not really the whole truth though. The more visible bitcoin mining operators did move at least part of their operations, and the growth of non-China, mostly U.S.-located mining is well documented. To highlight that, hashrate – the computational power of the Bitcoin network – has grown 40% since the China ban. The CCAF, recognizing the oddity of the data, published a wonderfully titled blog post about their update leaving us with this: Most notably, however, is China’s apparent comeback. Following the government ban in June 2021, reported hashrate for the entire country effectively plummeted to zero during the months of July and August. Yet reported hashrate suddenly surged back to 30.47 EH/s in September 2021, instantly catapulting China to second place globally in terms of installed mining capacity (22.29% of total market). This strongly suggests that significant underground mining activity has formed in the country, which empirically confirms what industry insiders have long been assuming. The operative word here being “reported.” So yeah, it turns out that China can in fact ban bitcoin mining again. Here’s to more China FUD (fear, uncertainty, doubt) in our future. Alternatively, maybe everyone is messing with us and using VPNs to change their location to China to make my job difficult. Hashprice and mining company woes Amid falling bitcoin prices, there is also some concern around bitcoin miners and their profitability. There is a metric developed by Luxor Technologies called hashprice which represents the expected value of mining. Hashprice is expressed as a dollar per terahash per day, a terahash being the computational power provided by mining equipment. Here is how the last month has fared for hashprice. |
Hashprice has trended down due to 1) the USD price of bitcoin falling, 2) more miners coming online and 3) the subsequent increased network difficulty (the network adjusts how hard it is to mine roughly every two weeks, based on the amount of active mining power). Not exactly rosy, but it makes sense. And the decline is acting as a forcing function for mining operators to buckle down or shut down. Many industry practitioners are warning that this is the time when “only the strong will survive.” In theory, miners turn off their machines whenever bitcoin prices drop significantly, and it becomes unprofitable to keep them running. This time, even though hashprice has decreased, we haven’t seen this sort of drop off, and we have the public mining company filings to prove it. Public miners have all publicly repped to something along the lines of, “We are mining bitcoin, we want to mine more bitcoin, we are going to hold as much of the bitcoin we mine as possible and we’re going to use other sources of capital to fund operations and growth.” That could be fine, but as these miners feel more pressure, there are potential obligations to capital providers they might have to answer to. On top of that, if the market gets worse, these companies may need to do something, like start selling their bitcoin. These aren’t companies with the balance sheets of Apple or Google; they more closely resemble startups that happen to trade on the public markets. All said, there is no particular reason to worry about the mining industry as a whole. Bitcoin mining will be fine, but the cast of characters might change since the capital markets are available up until the moment they aren’t. Bitcoin will be better for it, but there might be some pain coming at the company level. |
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A proposed Bitcoin upgrade, BIP 119 or CTV, introduced by developer Jeremy Rubin has been generating discussion in the community. - TAKEAWAY: Currently, Bitcoin scripts can only be used to designate when or why a bitcoin is spent. CTV would introduce new scripting logic for how a transaction can spend specific coin(s) where users can create a template that creates specific spending conditions for a coin. Plenty of Bitcoin developers and stakeholders see benefits to CTV, but plenty of others say that the upgrade needs more careful thought. Read more here.
Bank of America says concerns of a so-called crypto winter are unfounded. - TAKEAWAY: The second-largest U.S. bank said the cryptocurrency sector is an “emerging tech asset class and the tokens that power the ecosystem trade like high, growth, speculative risk assets,” in response to investors wondering why digital assets are not outperforming traditional ones. Moreover, despite the recent collapse of algorithmic stablecoin UST, Bank of America added that banning algorithmic stablecoin would be “premature” and could slow the ecosystem’s growth. Read more here.
The Biden administration wants crypto exchanges to separate customer and corporate funds. - TAKEAWAY: Crypto exchanges mingle their funds with customers’ holdings in the same pool. Coinbase, one of the largest exchanges, admitted last week to the SEC that “in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.” As a result, the Biden administration is calling Congress to demand crypto firms keep customer assets walled off from corporate funds. Read more here.
G7 finance ministers push to accelerate crypto regulations globally. - TAKEAWAY: Against the backdrop of the terraUSD stablecoin situation, finance ministers from the Group of Seven largest developed economies are urging the Financial Stability Board, led by Klaas Knot, “to advance swift development and implementation of consistent and comprehensive regulation.” Knot has already volunteered to write a crypto rulebook that could cover financial stability and investor protection. Read more here.
FTX US has rolled out stock trading. - TAKEAWAY: In their aggressive push into the traditional financial ecosystem and to get a bigger slice of the U.S. retail pie, FTX US launched stock trading functionality on May 19. FTX US will not charge trading fees nor will the company monetize traders’ orders by selling the flow to high-frequency traders. President Brett Harrison said, “Our goal is to offer a holistic investing service for our customers across all asset classes.” Read more here.
– Sage D. Young |
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