Exploring the transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

Jan. 7, 2022

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It hasn’t been a rosy start to the new year for crypto markets. At the end of the first week, pretty much everything is in the red. Money Reimagined’s first column of 2022, part of an all-Bitcoin newsletter, takes a look at one potential contributor to this dour mood – an unexpected slide in the Bitcoin hashrate brought on by a dictator’s desperate moves in Kazakhstan, the second biggest bitcoin mining country after the U.S. There are lessons in this, I argue, for the U.S. Congress, which has the capacity to influence how mining develops in the U.S. and overseas.

In this week’s “Money Reimagined” podcast, my co-host Sheila Warren and I look at the busy regulatory and legislative calendar that lies ahead for crypto with Congressman Darren Soto, a Democrat representing Florida’s 9th District. Soto is co-chair of the Congressional Blockchain Caucus.

Have a listen after reading the newsletter.

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Melody Wang/CoinDesk

A big disruption in Bitcoin’s hashrate this week can be pinned on one man: Kazakhstan President Kassym-Jomart Tokayev, who after declaring a state of emergency during opposition protests ordered telecom carriers to impose an internet blackout, which meant Kazakh-based Bitcoin miners couldn’t operate.

Does this indicate that Bitcoin is becoming vulnerable to geopolitical risks? Not really. In many other ways Bitcoin has become more resilient after China’s crackdown last year led to a diversification of mining around the world. Bitcoin’s recent performance reinforces that dynamic adaptability.

Still, there are vital lessons to draw from the fact that the Bitcoin mining economy was materially impacted by the actions of a single dictator, one whose Central Asian country now occupies a large post-China place in that economy, to which it supplies cheap-but-dirty coal-based power.

The U.S. Congress, which is now reportedly planning hearings to address some lawmakers’ concerns about energy usage by Bitcoin mining, should heed those lessons.

A draconian response in Washington (e.g. in limiting miners’ energy access) would encourage U.S.-based miners to move to countries like Kazakhstan that are doing close to nothing to expand renewable energy. Alternatively, if Congress was to seize this moment – when the appeal of authoritarian states as homes for crypto businesses has been tarnished – it could craft a constructive policy framework that aligns Bitcoin mining with green energy expansion and supports the kind of democratic freedoms Kazakhs deserve.

Read the rest of this column here.

This week’s chart, prepared by CoinDesk’s Shuai Hao, illustrates the story told in the column above. It captures data from mining pools about their deployed capacity, aggregated to function as a proxy for the Bitcoin network’s total hashrate.

The bigger part of the chart should be familiar to all who’ve followed the China crackdown story: the massive drawdown in Bitcoin’s hashrate last spring and early summer and the impressive recovery from that – despite sluggish markets – to new record highs by year-end. Less familiar is how volatile the hashrate is, reflecting oscillations in energy availability, time zone differences, technical downtime and other factors. As mentioned above, it includes the impact of unforeseen problems such as a shutdown at the Binance mining pool on Nov. 24.

For now, though, set all that aside and look at one element: the pronounced vertically sloping downward line at the very end of the chart. That’s the Kazakhstan effect.

What happens next? There’s presumably no more Kazakh capacity to come offline, so it’s unlikely the hashrate will continue to fall, unless some other extraneous factor drives it lower. The real question, then, is how long it takes the hashrate to recover to the record highs it stood at before President Tokayev moved to starve protestors of information.

Will this look like all those interim blips you see in the jagged chart above, the temporary moments of hashing power going on- or offline? Or will it be more lasting, like China’s move? That will tell us about the impact of politics on Bitcoin and, in turn, the network’s ability to rise above that politics and find an alternative outlet for its activity.

The Conversation

“Que Lujo”

No conversation this week, just this one tweet about people literally throwing away money.

Is there a greater image of political failure than this? The value a citizenry ascribes to its government’s currency is, in essence, an expression of its trust in that government, which by extension is a measure of how well that government is able to govern.

Yes, there’s an irksome triumphalism to the predictable Bitcoin maxis’ replies to this tweet. But, if ever there were a “Bitcoin fixes this” case, it’s that of the forlorn country in which this scene was shot. (You don’t need to understand the video narrator’s giggling Spanish to know which one it is.)

Such monumental failure, for so long – almost 23 years of Chavismo, and counting – calls not just for a change of government but for a change of paradigm. The discarded banknotes speak to the absence of any institutional legitimacy, which means that merely bringing in a new government can’t fix the problem. The destruction of trust runs too deep. Hence the argument to introduce a new institution: a system of money that’s free from the manipulation of any politician.

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Last year was the year in which Bitcoin lost its dominance. Per CoinDesk Research’s latest annual report, in 2021 BTC underperformed not only Ethereum’s ETH, but also so “layer 1” altcoins such as Solana’s SOL and Polygon’s MATIC (and by a wide margin). Yet in the same year, bitcoin soared to new highs just shy of $69,000, expanded payments on the Lightning Network, introduced the key Taproot upgrade and became legal tender in El Salvador.

Still, for the institutional investors who entered crypto markets last year for the first time, bitcoin remains the token of focus. As broad-based moves like this week’s occur, it is still the cryptocurrency that most encapsulates the story to be told.

So, even though the high-flying “alts” were even more severely bashed this week – one in which fears of tighter U.S. monetary policy hurt traditional markets but all-out trashed crypto markets – we’ll spend this first newsletter of the year focused on bitcoin, examining its disappointing performance, through the lens of CoinDesk market analyst Damanick Dantes.

Dantes closed out 2022 with a look at the wild events of 2021. It included the new highs for bitcoin, but the key word was “volatility.”
Monday, the first traditional trading day of the year, began with Bitcoin’s 13th birthday on what Dantes described as a “dull note.” He highlighted how analysts expect the cryptocurrency to remain “stuck in a sideways range.”
By Thursday, the mood had turned from “dull” to “extremely bearish” after reports of tighter-than-expected monetary policy from the Federal Reserve sent many crypto traders to take profits.