Hard Assets, Exchange Infrastructure, DeFi and More
Nic Carter, co-founder of Coin Metrics, commented on the monetary policy of global central banks and how the stage is set for bitcoin, even though BTC didn’t need a catalyst.
“It certainly looks like we’re in for a pretty rocky decade from a monetary perspective, so things couldn’t be better for hard assets like gold and bitcoin.”
He also remarked on the limitations of cryptocurrency exchange infrastructure.
“The bitcoin market is fairly informationally efficient, which means that it incorporates new information into the price in a fairly rapid manner. There are constraints to that efficiency and one of them is the market’s ability to absorb capital in a timely manner. And the exchange infrastructure is one of those constraints for sure. There is still a lot of regulatory uncertainty in the US as to how exchanges should be regulated, there’s no federal regulator for exchanges. And all of these exchanges for the most part are regulated by the states and a patchwork of different regimes. Most of the real liquidity is offshore, which complicates the matter…I would expect a lot more consolidation. I would expect a lot of these exchanges to get out of the business of custody and outsource that custody to third parties, BitGo, Fidelity Digital Assets, those are some of the emerging big custodians.”
Coin Metrics isn’t that involved in De-Fi but he pays attention to it. Carter issued the following waring:
“In the last couple of weeks, it’s become extremely frothy. I think that’s evident to anybody on the sidelines. There’s a lot of projects which have pretty extractive models, some which are effectively Ponzi’s unfortunately that have yet to wind down. And I think we’re going to see the moment the enthusiasm for DeFi lapses, some of these higher profile and more marginal projects will wind down. There’s a lot of leverage built up in the system. And a lot of these systems are built on positive feedback loops, which work great when things are on the way up and then are extremely bad on the way down.”
Bitcoin Hashrate Implications & Miner Economics
Sam Doctor is chief strategist at BitOoda, an institutional focused agency brokerage that is fully regulated by the SEC and CFTC. BitOoda in partnership with Fidelity recently published an in-depth analysis on the state of bitcoin mining. They spoke with more than five-dozen miners and several mining rig manufacturers, distributors and sellers in more than 150 locations across nearly two-dozen countries.
Doctor discussed the median cost to mine BTC.
“What we did was identify our price for about 40% of the total network. And so based on that, sort of extrapolating from there, we estimated what the median price would be for the whole network. Our price appears to be about a 3 cent median. The range is from under a cent in some geographies and goes all the way to about 8-9 cents. The median is about 3 cents. So at that price, the median price to mine a bitcoin works out to roughly about $5,000…I think that China seems to be one of the lowest cost jurisdictions. We certainly spoke with several Chinese miners, but we have less information about China than we do for some of the other countries.”
The hashrate recently reached an all-time high despite the fact that the Bitcoin halving took place just a few short months ago. Doctor explained,
“There are probably several different factors that play in. The first is the lower price power that you see in China particularly with the hydroseason, and I think there might have been some migration of capacity from slightly higher power prices to lower power prices.
What that meant is that older generation rigs like S9 which were temporarily non-profitable returned to profitability with both the fallen hashrate initially and the lower power price….The other factors that I would say is there are a number of mining rigs that have been paid for months ago. And as you probably know, mining rigs can sometimes take three to six months delivery time from the time you pay for them.
So once you receive them, and especially if they’re newer generation rigs that are more profitable than old generation rigs, you’re going to turn them on. And you know, when you turn them on, the other thing to remember is, you could turn off two old S9 rigs which generate about 28 terahashes and replace that with an S19 rig, which generates 110 terahashes. So even though power consumption is increasing, the hashrate could effectively triple or almost quadruple — with nothing else changing, just simply getting a new rig.”
Teana asked Doctor what scale of funding will be required to support growth for miners.
“We sort of think about this as how far can the hashrate go, and what would it take to get there. We think that hashrate is now about 135 exahashes could get to about 260 in about a year and 360 in two years. And to get there, it requires over $6 billion of capital investment and I think most of that, probably roughly about $4 billion of that would need to be external funding. That of course is a function of price. If bitcoin went to $20,000, you don’t need as much external funding because you’re making more money yourself,” said Doctor.
Bitcoin smashed through $11K this week, and Nisa asked James Bennett of ByteTree what he thinks about network demand.
- “We saw really low volatility in the lead up to this breakout. I think we were down below 25% annualized volatility, which for bitcoin is super low. And during that time, we were seeing network demand steadily rising. So we had fees increasing, we had velocity increasing, we also saw spend increasing. And we had from ByteTree, four out of the six indicators we usually track were on. And we saw this break to the upside, and it’s been extremely exciting to see that play out over the last few days,” said Bennett.
Nisa points out that miner revenue is close to $10 million per day. Bennett said it’s looking “super healthy,” adding:
- “Seeing their revenues increased is actually really bullish for the long-term health of this industry and specifically the Bitcoin network. They now make up to 12% of the total revenue, so 12% of revenues come through fees, which is one of the highest levels we’ve seen and the uptrend is steadily increasing…Lighting is actually also at an all time high; so the total value of bitcoin locked in the Lightning channel is at an all time high. That basically means people are able to pay more fees on the Bitcoin network.”
There are so many different things driving the BTC price.
- ”You’ve got Grayscale on the one hand that’s buying up pretty much all of the new coins that were mined in Q2 of this year for institutional demand then leads to retail flows. Of course the inflation hedge is real. So we’ve seen tech stocks dropping off last week, after a magnificent bull run and strong recovery off the back of the COVID liquidity crunch in March. Bitcoin’s held its own against falling tech stocks. So for sure in the macro environment that’s playing out. And when you look on that buy side of institutional and retail, it’s playing out. And then when you look at the actual use of the network….and network demand, it’s increasing. And so all of these different things are contributing to upward momentum that we’re seeing right now in bitcoin,” said Bennett.