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Let's talk about Bitcoin & the energy argument.
It's something that has sporadically grabbed my attention for the past few months (ever since the 'Bitcoin uses as much energy as a small country' headlines first hit).
Brent Donnelly (HSBC) sent this note on Friday 👇
And back down the rabbit-hole I went...
"... sometimes I've believed as many as six impossible things before breakfast"
First up, the energy argument was wonderfully covered by Lyn Alden here.
This is the key snippet 👇
The Bitcoin network currently uses as much energy as a small country. This naturally brings up environmental concerns, especially as it grows.
Similarly, gold mining uses a ton of energy. For each gold coin, a ton of money, energy, and time went into exploration for deposits, developing a mine, and then processing countless tons of rock with heavy equipment to get a few grams of gold per ton. Then, it has to be purified and minted into bars and coins, and transported.
It takes several tons of processed rock to get each 1-ounce gold coin, and thousands of tons of processed rock for each good delivery gold bar. The amount of energy that goes into a small unit of gold is immense.
In fact, that energy is what gives gold value, and what made it internationally recognized as money for thousands of years. Gold is basically concentrated energy, concentrated work, as a dense store of value that does not erode with time.
There’s no limit to how many dollars, euros, or yen we can print, however. Banks multiply them all the time with a stroke of a keyboard. Likewise, industrial metals like iron are very common as well; we have no shortage of them. Gold, however, is very rare, and when found, it takes a ton of energy and time to get into pure form. And then we have to spend more energy transporting, securing, and verifying it from time to time.
However, the world does that anyway, because it derives value from it compared to the value that it had to put in to get it. Gold mining and refining requires energy, but in turn, central banks, institutions, investors, and consumers obtain a scarce store of value, or jewelry, or industrial applications from the rare metal.
Similarly, Bitcoin takes a lot of energy, but that’s because it has so much computing power constantly securing its protocol, compared to countless other cryptocurrencies that are easy to attack or insufficiently decentralized.
Visa uses much less energy than Bitcoin, but it requires complete centralization and is built on top of an abundant fiat currency. Litecoin uses much less energy than Bitcoin as well, but it’s easier for a well-capitalized group to attack.
The question then becomes whether that energy associated with Bitcoin is put to good use. Does Bitcoin justify its energy usage? Does it add enough value?
So far, the market says it does and I agree. A decentralized digital monetary system, separate from any sovereign entity, with a rules-based monetary policy and inherent scarcity, gives people around the world a choice, which some of them use to store value in, and/or use to transmit that value to others.
Whether you agree or disagree, it's a well-balanced argument.
If you still have doubts, imagine a world where Gold has not yet been discovered, then one day someone walks up to you with a chunk of shiny yellow rock...
How do you get from that moment to the story of what Gold means across the entire world today?
Actually it's fair to say that even now, not everyone agrees on what Gold means, but a majority DO agree that it has value...
Many of those same arguments apply to the Gold Belief Spectrum too...
Shiny pet rock <----------------------------------------> The ONLY true form of money
OK, back to Brent's note and the energy argument...
Brent summarised the above essay as follows:
Rising energy consumption on Earth is inevitable as human advancement always requires more and more energy.
Energy efficiency is not the answer. Greater energy efficiency leads to more energy consumption, not less, due to Jevon’s Paradox.
Money and energy have always been implicitly linked.
With bitcoin, the link becomes explicit.
Money is energy. Bitcoin is energy.
There are many good arguments for crypto technologies to innovate and transform modern life in small ways that will cumulatively add up over time, but the Bitcoin Energy argument is one that I find deeply interesting from an investment perspective.
After all, if we don't solve the energy problem, these technologies will not be developed.
Square launched the Bitcoin Clean Energy Initiative in December last year, and published a whitepaper in April 👇
Now they want to prove the concept...
Why should we care about this?
Bitcoin as it currently exists is not a viable investment.
The current narratives are looking very stale (digital gold, a way to get rich, decentralised for a dystopian future), especially with the regulators closing in and highly volatile market swings.
How can Wall Street sell this to their clients?
It needs a new purpose, a new narrative.
Bitcoin still has the potential to be any number of things.
While it could just disappear, there's a huge sunk cost and feeling of unfinished business.
Too much to just give up and walk away without at least trying some new things, right?
So, which is most probable? Which grand idea could spread?
The energy idea is so obvious.
Incentivising (green) energy production is an imminent problem that needs solving.
It's a narrative that could easily stick.
Not enough people truly care about green energy and the future right now, but give them a way to profit from it, and you can bet they suddenly will..
This new story of Bitcoin would fit the E & S part of a well-balanced ESG portfolio too.
Environmental because it incentivises and supports clean energy investments
Social because it can be attached to energy production in developing countries and poorer areas.
The Internet connectivity to make this viable in less developed areas already exists and is continuing to develop (e.g. Starlink / OneWeb)
This E.S. and energy transformation argument is a far better sales pitch than the 'store of value' that fails to distinguish it from Gold.
Bitcoin suddenly becomes a unique investment asset (again)
Wall Street will be more than happy to package this 'feel-good' investing and sell it to the wealthy (who are so very motivated to signal their virtues...)
Coming soon to a garden party near you:
We're helping to build a better world and making money from it daaaaaahling. It's so wonderful.
Maybe this is all highly speculative nonsense from the depths of my imagination, but it just seems such an obvious chance to take Bitcoin into the mainstream investment world.
Whether it can actually be successful as a store of energy or not is a whole other discussion, and one I feel entirely unqualified to judge.
From an investment perspective, I'm not sure it will even matter...
Surely they'll at least give it a try?