07/20/2023 0 Comments

1. Exploring the implications of reaching the end of Bitcoin mining and the future of the crypto market

According to the M2 approach, the money supply in the US has expanded by more than 40% since January 2020. As has been seen throughout history, inflation occurs when there are no clear constraints on the supply of currencies and when governments are free to issue money whenever they like. Given this result, Satoshi Nakamoto, who invented Bitcoin, set a limit on the number of outstanding Bitcoin that could ever exist at 21 million. The miners will profit from creating new Bitcoins as they are mined to process and validate transactions; a supply cap will affect their income.

A maximum of a few million Bitcoins are left in existence after more than 19 million have already been mined. Newly created Bitcoin from “block rewards” and transaction fees from users who transact on the network are the two main sources of income for Bitcoin miners. Based on Satoshi’s original coding, the supply schedule for Bitcoin block rewards is designed to reduce the reward miners receive every four years gradually.

The Bitcoin algorithm is set up so that a new block is added to the network every 10 minutes and the miner who validates and adds that block receives the block reward. Since the current block reward is 6.25 Bitcoin for each block, 900 new Bitcoin are created daily. The payout is reduced by half after 210,000 blocks or a “halving” event. A halving event has a significant effect since miners lose half of their block reward income immediately. When Bitcoin was first made available, the block reward was 50 Bitcoin for each block, but at the time, the market price of Bitcoin was considerably less than US$100. Therefore, the value of those payouts was far smaller.

The transaction fees collected when a Bitcoin block is introduced serve as the miners’ other source of income because their income will be significantly impacted every four years. A transaction fee, which is paid out to a Bitcoin miner directly, must be paid for a person to transmit someone Bitcoin. Transaction fees do not now give a miner a sizable portion of their income.

Based on current pricing, a miner only makes an average of 0.14 Bitcoin for each block. Recent market pricing shows miners create around US$4,000 every block or US$576,000 daily. Although this amount is now little compared to the almost US$1 trillion in value that Bitcoin secures for the network, we may anticipate an increase in transaction fees as the ecosystem develops.

According to the current plan, all Bitcoin will be created and put into use by the year 2140, which gives the network plenty of time to expand and go global. The only source of income for a miner in 2140 will be the network’s transaction fees. Even though there are no guarantees that transaction fees will ever replace the existing block rewards, many Bitcoin fans think that significant user growth and development will result in higher miner profits.

Even though there are now just a few applications for Bitcoin, and its commercial adoption as a payment system is still in flux, it is very feasible that in the years to come, more organizations, banks, and businesses may turn to Bitcoin for its settlement capabilities. It is impossible to overstate the significance of transaction fees because the long-term sustainability of the Bitcoin ecosystem depends on miners having a reliable income source. Today, it is safe to conclude that most miners will continue to derive most of their income from block rewards.

2. A Blackrock ETF Would Supercharge the Bitcoin Mining Industry

Launching the first unequivocally positive news cycle for the Bitcoin space since the collapse of FTX, BlackRock recently decided to file for a spot bitcoin exchange-traded fund (ETF). Within a few days, two additional behemoth money managers joined BlackRock as Invesco reactivated its application for a spot BTC ETF and ETF-specialist WisdomTree submitted its third application for a BTC ETF to the U.S. Securities And Exchange Commission (SEC).

As of this writing, nobody can say if the proposed vehicles will be approved by the SEC, which has recently made headlines for its heavy-handed pursuit of crypto’s most prominent exchanges in Coinbase and Binance. We will know soon enough.

What is more pertinent at this point is a review of the underlying trend: Institutional money is slowly working its way into the bitcoin economy. In the realm of bitcoin trading, high-profile investors’ commitments to date have been shaky and driven by the boom-and-bust cycle typical for nascent industries — and certainly a defining trait of the bitcoin economy so far.

BlackRock’s potential spot BTC ETF could be a real bridge to mass adoption. Some voices have declared it offers the best chances of approval yet, not just because of the applicant’s prestige but also thanks to a proposed surveillance-sharing agreement that seems to be key in the SEC’s eyes. But regardless of the fate of this proposal in particular, an examination of Bitcoin infrastructure being built today provides an unambiguously bullish picture of institutional money’s bet on the industry.

For instance, one of the world’s most active and successful venture capital funds, Andreesen Horowitz (a16Z), has doubled down and announced its first-ever international office, to be opened in London, to largely focus on the development of the crypto economy.

However, institutional investors’ hunt for growth opportunities is nowhere as pronounced as it is in Bitcoin’s fundamental infrastructure: mining. Champions of the mining industry are signing deals and building at a breakneck pace, while their competition gets fiercer and the network hash rate continues to hit all-time highs.

BETTING BEYOND BITCOIN

Being less shiny and exciting than the asset trading counterpart it underpins, reporting about investment in the mining space can be muted. However, it is my experience that big name investors, large utilities and even government entities in the U.S. and worldwide are cleverly assessing opportunities and employing considerable financial resources to shape the market. And this is for good reason: the data centers that host Bitcoin miners are equipped to do a range of high-performance computing in the future and the value proposition of this in the advent of AI is clear as day.

3. Bitcoin mining is becoming more environmentally friendly

Bitcoin mining’s environmental impact has always been a controversial topic. On the one hand, critics emphasize that securing the Bitcoin network takes more power than some whole countries’ annual electricity consumption. On the other hand, much of the crypto community argues that it is a necessary activity that has enabled the Bitcoin blockchain to remain extremely resilient against external attacks with an almost 99.99% uptime throughout over 14 years of its history.

However, recent developments in the market have provided an opportunity for participants to make Bitcoin mining finally sustainable.

Bitcoin mining doesn’t deserve its bad reputation

Before going over the benefits themselves, it’s essential to first get some facts straight about Bitcoin mining. With comparisons to nations’ energy consumption and estimates that a single BTC transaction has a carbon footprint of nearly 820,000 Visa transactions, it should be highlighted that this activity doesn’t actually produce any emissions.

Instead, this “dirty work” is done by the power plants that supply the electricity to the mining rigs. Similarly to households or other business entities, miners only use the electrical infrastructure that exists in any given location.

Ever since Tesla stopped accepting Bitcoin payments in May 2021, citing environmental concerns, many have jumped on the bandwagon to criticize the blockchain network’s energy consumption. However, while it is important to address Bitcoin mining’s high electricity usage, it should not be done in a vacuum, as it is not the only power-hungry industry out there.

According to the Bitcoin Mining Council, BTC mining consumes only a fraction of the energy required to power industries, such as construction (3.77%), finance and insurance (4.45%), shipping (5.41%) and aviation (5.43%). It even takes nearly 2.6 times the electricity to mine gold than to secure the Bitcoin network. And that’s without even discussing the disposal of electronic devices, as well as the agriculture and livestock industries, which are among those with the most significant environmental footprints.

Considering the above, it seems unfair to point out Bitcoin mining’s high electricity usage without mentioning how much power other industries consume each day.

Mining is becoming an increasingly sustainable industry

Despite controversies around the topic, the fact remains that it takes a significant amount of electricity to secure and maintain the Bitcoin network. The question is how to make Bitcoin more sustainable.

One solution would be to combine Bitcoin mining with other business activities in a beneficial manner. For example, hydro-cooling mining farms can supply heat to greenhouses, fish farms, buildings and even entire communities. While only eight WhatsMiners are needed to warm a 10,000-square-foot greenhouse, increasing water temperature by 10 degrees Celsius via mining rigs can shorten the period of growth of salmon in fish farms by up to three times. Another potential use case includes developing small hydropower plants to co-consume electricity with local communities.

Using associated petroleum gas (APG) to power Bitcoin mining rigs is also a key highlight in this field. As you may already know, APG is a byproduct of oil drilling. As it is not always worthwhile for producers to use it, they regularly burn it on-site. The latter process is called gas flaring, which led to 2.7 billion tonnes of CO2 equivalent emissions in 2021, along with the gas wasted in venting and methane leaks.

Instead of wasting this resource, Bitcoin miners can transform APG into energy to power their rigs. By preventing flarings, this activity can have a favorable effect on the environment. In fact, a report revealed that Bitcoin mining can decrease the percentage of flared gas by each oil producer by 80%.

At the same time, researchers have also found that it is by far the most cost-efficient way to decrease emissions, surpassing the values of wind and solar by multiple times. This is probably why many smaller oil and gas companies in the United States are mining BTC with flared gas.

The road to a greener Bitcoin

As Bitcoin miners have been migrating to countries where they have access to cheaper energy in the form of renewables, this has presented an opportunity for market participants to increase the industry’s sustainability.

With initiatives like preventing gas flaring and combining it with other business activities, the long-term goal is to make Bitcoin mining eco-friendly. Ideally, every industry should become as sustainable as possible while minimizing the harm caused to the environment. Putting in effort to make this possible is what being responsible market participants is about.

Bitcoin mining is already doing a lot to transform the energy sector due to miners being very flexible in their electricity consumption. And as this industry’s sustainability improves in the years ahead, it will attract many large-scale investors who are interested in investing in eco-friendly businesses.

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Harvey CHEN

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