More than three years have passed since I wrote a very extensive series on Bitcoin (BTC-USD), comprised by the following articles:
For most of that time, Bitcoin went nowhere. However, with the 2020 coronavirus epidemic and the resulting extraordinary monetary and fiscal stimulus, a Bitcoin speculative frenzy has taken place again. This speculative frenzy has now gotten so far that Bitcoin’s market capitalization today stands at $860 billion.
In five months, Bitcoin went from $9,740 to $46,400 as I write this. The latest 20% rally came on the heels of Tesla (TSLA) disclosing it had bought $1.5 billion of the digital currency (“to maximize returns,” since Bitcoin pays no interest, this is speculative as well – it requires others to pay a higher price):
In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, we may invest a portion of such cash in certain specified alternative reserve assets. Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt. We believe our bitcoin holdings are highly liquid. However, digital assets may be subject to volatile market prices, which may be unfavorable at the time when we want or need to liquidate them.
To many investors, the news that Tesla was buying bitcoin (and possibly accepting it as payment) might have been seen as the ultimate validation of this digital currency. Here we have the future of cars and energy, investing in the future of currency.
However, Bitcoin is not likely to be the future of currency. In my Bitcoin Series I long explained many of the details which make it a bad currency, between transaction costs, speed and security, as well as regulatory risks.
Since those articles (but not because of them), most of the Bitcoin world already had quit on thinking about Bitcoin as a currency – and slowly pushed it more towards it being an asset and a “store of value.” However, new entrants, unaware of Bitcoin’s history, might not be as well informed as old timers.
You see, money, currency, generally serves three functions:
If Bitcoin really was the future (of money), then what we’d see would be a more and more widespread adoption and usage in commerce. We already knew this wasn’t true in 2017. What’s literally amazing is that between 2017 and 2021 things haven’t changed much.
For instance, BitPay, the largest cryptocurrency merchant processor:
Source: Bitpay
Source: Bitpay Georgia Tech MBA Lecture
You can see the problem here, for sure. Commerce usage isn’t huge. Of course, 2021 will see something of a spike, but just because Bitcoin increased a lot in value, not because of more generalized adoption.
Also, in 2020 we saw Bitcoin starting to see more widespread availability due to apps like PayPay or Square (SQ). This will certainly increase usage, but the problems intrinsic to Bitcoin, namely its volatility, will still mean it won’t be a currency, just a liquid asset.
It’s not a tall barrier to jump, to be deemed an asset. Yes, Bitcoin is an asset. The reason for this is simple:
Things as intangible as patents or even trademarks can be assets. It’s thus no surprise, and of no great benefit, for Bitcoin to be an asset.
Since little usage is given to Bitcoin as currency, most of the remaining transactions on Bitcoin are essentially speculative. I say “most” because there’s usage given to Bitcoin as a currency which isn’t captured easily, because it represents illicit activity. Thus, Bitcoin is a very speculative asset. A trading cryptosardine if you will. Though a very valuable one.
There’s a trend worldwide, whether you accept it or not. This trend is one of a fight against global warming / climate change. This is a trend which is getting ever more attention from politicians, and which will now see a large increase in focus from the Biden administration in the U.S.
Already, due to the extreme monetary and fiscal stimulus, we’re also seeing extreme speculation in many other sectors, not just Bitcoin. Several of these sectors share a common story – the fight against global warming / CO2 / carbonization. Think about it:
Now notice the following. All of these businesses have bubbled up because the market expects a more intense regulatory fight against CO2. This fight is also at the core of why Bitcoin cannot be the future.
Bitcoin is simply the most intensive CO2 asset in existence. Its very existence is based on burning electricity in proportion to the value of Bitcoin itself, because typically the block reward (new Bitcoins) given to miners is the main miner compensation. And miners are in something of an hash power arbitrage race to get those new Bitcoins, which makes the amount of computing power available to mine bitcoin be a function amount of electricity each bitcoin is worth. There’s a counterweight to this in that new, more efficient technologies are deployed which reset the total amount of electricity wasted – but then the arbitrage again pushes up the total electricity spent after a while.
Electricity, itself, is produced at the cost of emitting CO2. This is true even if electricity comes from solar power of hydropower, as manufacturing those clean power sources is, itself, CO2 intensive. And moreover, in the absence of Bitcoin demand, less electricity demand would be sent towards such sources as natural gas or coal to begin with (electricity is fungible).
Broken down into what goes into a single Bitcoin transaction, things get really interesting:
Source: Digiconomist
Over time, Bitcoin always was likely to get more regulated due to its enabling of illicit transactions.
However, also over time, in a world trying to fight CO2 emissions, it wouldn’t be surprising to see extreme regulation or banning of Bitcoin simply on environmental grounds.
It’s not possible for a currency or even speculative asset to be the future, at least in the developed world, while being so carbon and energy intensive (and having massively cheaper and less energy intensive alternatives). Even Tesla will get blowback from holding Bitcoin and will at some point sell because of this reality.
It’s a matter of time until legislators, already motivated to act against Bitcoin due to illicit use and tax evasion, see this carbon reality and be motivated to act against it.
Bitcoin can’t be the future while being so carbon intensive. And it can’t stop being carbon intensive because of its very nature – the Bitcoin transactions are validated by “proof of work.” The more valuable Bitcoin is, the more work it elicits. Work takes power. Power generation creates a large carbon footprint.
Since electricity consumption is fungible, one cannot say that Bitcoin power is coming from renewables, as that would simply be displacing other electricity users. Moreover, even creating renewable power sources requires CO2 emissions.
In the end, you cannot both believe in Bitcoin for the lust of money (as a speculative asset, that’s all investors see in it), and be in favor of action against CO2 levels and global warming. Both things are incompatible.
One exception, though. People can easily hold two contradictory thoughts at the same time, especially when it’s in their interest (they’re making money on Bitcoin). However, regulators and lawmakers, if they’re incentivized to fight global warming, also will be incentivized to regulate against Bitcoin on environmental grounds.
One final note. Remember. Gold takes no continued effort to keep on existing. Bitcoin requires work to be constantly performed for it to simply exist. A pure zero is possible, if this work stops for any reason. I’m no fan of gold, and gold has many disadvantages over Bitcoin, but this basic reality ought not to be forgotten.
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I am a Portuguese independent trader, analyst and algorithmic trading expert, having worked for both sell side (brokerage) and buy side (fund management) institutions. I’ve been trading professionally for about 20 years.
I have a Marketplace service here on Seeking Alpha called Idea Generator that’s focused on real-time actionable ideas based on valuation and catalysts. The Idea Generator portfolio has beaten the S&P 500 by more than 24% since inception (in 2015).
I also launched www.thinkfn.com in 2004. Thinkfn (Think Finance) carries thousands of educational articles on finance and markets (in Portuguese).
I trade futures, stocks from the long and short side, forex and options. I trade both discretionary and fully automated systems (Metatrader, Quantshare and others). I can be reached at paulo.santosATthinkfn.com or followed on Twitter at twitter.com/ThinkFinance999
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
