Bitcoin: More Electricity Consumption Than the Entire Planet?
I am tempted to predict the price of bitcoin for the end of 2018 but know I’d be wrong, so I’m not. It could be $1 or $1 million. I’m not going to forecast it, as there are over 1,000 digital currencies out there and who knows which will be the winner long-term.
However, one controversy reared its ugly head just before Christmas and my mate Brett King knocked this one on the head. The controversy related to all the stories about bitcoin mining and how much electricity it used. Brett’s response in a guest post below:
Why Bitcoin won’t result in the complete collapse of society, but might result in an energy revolution
If you believe the hype, not only are bitcoin miners using more electricity than a number of small countries, but within just two years, Bitcoin is expected to take the world’s entire energy supply to continue its mining activities.
Here are some of the more outlandish claims surrounding Bitcoin’s energy use:
- Bitcoin is destroying the planet
- Bitcoin consumes more energy than 159 countries
- One Bitcoin transaction now uses more energy than your house in a week
- “Bitcoin mining on track to consume all of the world’s energy by 2020”
Let’s think about that. Are we to believe that in just two years, all airports, telecoms, railways, hospitals, schools, and the internet will shut down globally in favor of bitcoin mining farms? Is that what you’re honestly telling me is going to happen? No, I’m sorry. That’s just crazy talk, or clickbait — whichever you prefer.
Bitcoin IS most certainly energy intensive
First of all, if you need a primer on how bitcoin mining works, the Economist ran a solid piece on this back in 2015 — “How Bitcoin Mining works” via The Economist
Probably the best article I read on this disinformation and difficulties in estimating Bitcoin energy usage for mining, came from a recent Wired article:
“There are plenty of other estimates, but the key point is they’re all very different. The real range is probably somewhere between 100MW to 3.4GW. That’s like guessing someone’s age as between 15 and 65, while admitting there’s a margin of error of ten years.” — Wired UK: “How much energy does bitcoin mining really use? It’s complicated”, 2nd December, 2017
That sounds like a pretty wide margin of error. So, why is it so difficult to estimate energy usage?
If there was only one computer mining Bitcoin, it would be fairly simple to estimate the amount of energy that is used to transmute coal/gas/renewable energy into a single bitcoin. But that’s not the way it works. To mine a bitcoin you need to solve an increasingly complex mathematics problem built into the Bitcoin code base — solving the crypto-math problem results in a reward of a Bitcoin block (12.5 bitcoins) on the blockchain. Solving the math problem requires specialized GPUs (Graphic Processing Units) number crunching for hours at a time until 2012, when the first SHA-256 asics became available. Even so, a fairly typical computer with an average type of SHA isn’t going to cut it — a recent estimate was that to mine a single Bitcoin using an average computer would take you around 1,367 years (see Bitcointalk.org).
Part of the problem is, that all those Bitcoin miners are racing to solve the same problem, but only the miner who solves the problem first gets to actually claim the block. All the other miners lose out, and their energy goes to waste. Even with that probability, with 1 Bitcoin at roughly US$20,000, there’s plenty of incentive to try.
The farm above in Russia produces about 600 Bitcoin’s per month, on an energy bill of approximately US$100,000. That’s about $12 million return, in today’s terms, for $100,000 of energy cost. Obviously there’s hardware and people costs to take into account, but even on that basis the returns are phenomenal.
The largest mines in China consume $40,000 per day in energy, and have located in remote parts of China setting up as close to generation facilities as possible (source: Quartz qz.com article). This one mine in Ordos, Inner Mongolia alone accounted for about 4% of all Bitcoin daily mining as of August 2017. China recently banned bitcoin mining activity (see Coindesk.com), but my guess is that these farms won’t just close up shop willingly with incentives so high.
Should we ban Bitcoin mining?
Nah, that ain’t going to happen. However, at some point the excess capacity for the current energy grid will be all taken up, and miners will be told that they’re consuming as much energy as the grid can give them. At that point, either miners max out on their Bitcoin production capability, or they start investing in their own generation capability. If they do, I can guarantee you they won’t be building coal fired generation plants.
In Ramez Naam’s talk on Exponential Energy, it’s stuff like Bitcoin mining, climate change, increasing use of autonomous vehicles, fleets of robots and drones, etc., that are all going to drive down the cost of renewable-based electricity production. Today, coal-fired plants in the US and China cost between 7–14c/KwH (subsidized), whereas Mexico and the Middle East are already booking long-term solar contracts at 1c/KwH (unsubsidized). Naam makes the point that enough sunlight hits the Earth every 10 seconds to satisfy the world’s entire energy needs for that day, or over an hour we’d be able to meet the world’s energy needs for a year — if only we could efficiently utilize it.
That’s where solar and Bitcoin are obvious bedfellows. The cost of deploying solar farms that mine crypto-currencies (or crypto-assets) with an increasing robust crypto-exchange market, is still going to be fractional compared with the return. There’s a really strong argument that solar-based Bitcoin mines could be much more viable on a medium-term basis.
There’s more than enough energy coming from the sun to mine all the Bitcoins we need — if only we change our view of energy.
There is abundant energy available for whatever needs we might have if you deploy solar.
Smart Economies will be based on new energy and capital markets
The economies of 2020 will compete based on quantum computing power, digital assets and commodities, artificial intelligence, automated value chains and new exchange mechanisms. As I’m writing this today, Donald Trump is using the derailment of an Amtrak train to push his agenda for rebuilding the US’ own dramatically aging infrastructure to compete with China, Russia and others. The fact is, that solar and crypto-currencies are both elements of a new type of economic advantage. The ability for markets to operate in real-time over a new infrastructure built for the digital age.
Coal, Gas and 180 million utility poles in the US today are not the foundations for a smart economy. China, on the other hand, is racing to deploy solar much faster than anticipated — 43 Gigawatts of capacity in the first 9 months of 2017 alone, with expectations of closer to 60 Gigawatts by year end. That’s more than the entire US solar install base superseded in one year.
If the forces of Solar and Bitcoin align, it could very well redefine the way we think of underlying market growth powering the economy. With energy making up a substantial element of global commodities trading, the clear shift towards renewable sources of energy production over the next 20 years means that markets will go searching for stronger growth and returns. Solar and crypto offer those opportunities.
Whichever way you look at it, Bitcoin mining has to go the way of solar fast, or it will cap out based on available energy. The only way to build enough capacity to power the crypto mines of 2020 is for miners to build renewable energy production facilities. That solar capacity won’t consume fossil fuels, won’t create CO2 and will be reusable for generations to come.
All the Talk of an Accelerating Economy and Rising Inflation Just Doesn't Add Up
The biggest news for the markets this week came from the Federal Reserve. On Wednesday, it released the January Federal Open Market Committee meeting notes and they were interpreted as dovish by some and hawkish by others as analysts raced to divine insight from the text.
The recent data isn’t supporting the narrative of accelerating global growth and inflation while equities continue to experience higher volatility. What does it mean for stocks, bonds and yields? Glad you asked! Here’s my take on why all the talk on an accelerating economy and rising inflation just doesn't add up when you look at the data.
Equity Markets — A Relatively Narrow Recovery
The shortened trading week opened Tuesday with every sector except technology closing in the red. The S&P 500 fell back below its 50-day moving average after Walmart (WMT) reported disappointing results, falling over 10% on the day, having its worst trading day in over 30 years.
Walmart’s online sales grew 23% in the fourth quarter, but had grown 29% in the same quarter a year prior and were up 50% in the third quarter. We saw further evidence of the deflationary power of our Connected Society investing theme as the company reported the lowest operating margin in its history.
Ongoing investment to combat Amazon (AMZN) and rising freight costs — a subject our premium research subscribers have heard a lot of about lately — were the primary culprits behind Walmart's declining numbers. To really rub salt in that wound, Amazon shares hit a new record high the same day. This pushed the outperformance of the FAANG stocks versus the S&P 500 even higher.
Wednesday was much of the same, with most every sector again closing in the red, driven mostly by interpretations of the Federal Reserve’s release of the January Federal Open Market Committee meeting notes. In fact, twenty-five minutes after the release of those notes, the Dow was up 303 points . . . and then proceeded to fall 470 points to close the day down 167 points. To put that swing in context, so far in 2018, the Dow has experienced that kind of a range seven times but not once in 2017.
Thursday was a mixed bag. Most sectors were flat to slightly up as the S&P 500 closed up just +0.1%, while both the Russell 2000 and the Nasdaq Composite lost -0.1%. The energy sector was the strongest performer, gaining 1.3% while financials took a hit, falling 0.7%.
The recovery from the lows this year has been relatively narrow. As of Thursday’s close, the S&P 500 is still below its 50-day moving average, up 1.1% year-to-date with the median S&P 500 sector down -1.0%. Amazon, Microsoft and Netflix alone are responsible for nearly half of the year’s gain in the S&P 500. The Russell 2000 is down -0.4% year-to-date and also below its 50-day moving average. The Dow is up 78 points year-to-date, but without Boeing (BA), would be down 317 points as two-thirds of Dow stocks are in the red for the year.
Fixed Income and Inflation — the Coming Debt Headwind
The 1-year Treasury yield hit 2.0%, the highest since 2008 while the 5-year Treasury yield has risen to the highest rate since 2010, these are material moves!
What hasn’t been terribly material so far is the Fed’s tapering program. It isn’t exactly a fire sale with the assets of the Federal Reserve down all off 0.99% since September 27 when Quantitative Tightening began, which translates into an annualized pace of 2.4%.
As for inflationary pressures, U.S. Import prices increased 3.6% year-over-year versus expectations for 3.0%, mostly reflecting the continued weakness in the greenback. The Amex Dollar Index (DXY) has been below both its 50-day and 200-day moving averages for all of 2018. The increase in import prices excluding fuel was the largest since 2012 and also beat expectations. Import prices for autos, auto parts and capital goods have accelerated but consumer good ex-autos once again moved into negative territory.
Outside the U.S. we see little evidence that inflation is accelerating. Korea’s PPI fell further to 1.2% - no evidence of rising inflation there. In China the Producer Price Index fell to a 1-year low – yet another sign that we don’t have rising global inflation. On Friday the European Central Bank’s measure of Eurozone inflation for January came in at 1.3% overall and has been fairly steadily declining since reaching a peak of 1.9% last April. This morning we saw that Japan’s Consumer Price Index rose for the 13th consecutive month in January, rising 0.9% from year-ago levels. Excluding fresh food and energy, the increase was just 0.4% - again, not exactly a hair-on-fire pace.
The reality is that the U.S. economy is today the most leveraged it has been in modern history with a total debt load of around $47 trillion. On average, roughly 20% of this debt rolls over annually. Using a quick back-of-the-envelope estimate, the new blended average rate for the debt that is rolling over this year will likely be 0.5% higher. That translates to approximately $250 billion in higher debt service costs this year. Talk about a headwind to both growth and inflationary pressures. The more the economy picks up steam and pushes interest rates up, the greater the headwind with such a large debt load… something consumers are no doubt familiar with and are poised to experience yet again in the coming quarters.
The Twists and Turns of Cryptocurrencies
The wild west drama of the cryptocurrency world continued this week as the South Korean official who led the government’s regulatory clampdown on cryptocurrencies was found dead Sunday, presumably having suffered a fatal heart attack, but the police have opened an investigation into the cause of his death.
Tuesday, according to Yonhap News, the nation’s financial regulator said the government will support “normal transactions” of cryptocurrencies, three weeks after banning digital currency trades through anonymous bank accounts. Yonhap also reported that the South Korean government will “encourage” banks to work with the cryptocurrency exchanges. Go figure. Bitcoin has nearly doubled off its recent lows.
Tuesday the crisis-ridden nation of Venezuela launched an oil-backed cryptocurrency, the “petro,” in hopes that it will help circumvent financials sanctions imposed by the U.S. and help improve the nation’s failing economy. This was the first cryptocurrency officially launched by a government. President Nicolás Maduro hosted a televised launch in the presidential palace which had been dressed up with texts moving on screens and party-like music stating, “The game took off successfully.” The government plans to sell 82.4 million petros to the public. This will be an interesting one to watch.
Economy — Maintaining Context & Perspective is Key
Housing joined the ranks of U.S. economic indicators disappointing to the downside in January with the decline in existing home sales. Turnover fell 3.2%, the second consecutive decline, and is now at the lowest annual rate since last September. Sales were 4.8% below year-ago levels while the median sales price fell 2.4%, also the second consecutive decline and this marks the 6th decline in the past 7 months. U.S. mortgage applications for purchase are near a 52-week low.
Again, that’s the latest data, but as we like to say here at Tematica, context and perspective are key. Looking back over the past month, around 60% of the U.S. economic data releases have come in below expectations and this has prompted the Citigroup Economic Surprise Index (CESI) to test a 4-month low. Sorry to break it to you folks, but the prevailing narrative of an accelerating economy just isn’t supported by the hard data. No wonder that even the ever-optimistic Atlanta Fed has slashed its GDPNow forecast for the current quarter down to 3.2% from 5.4% on Feb. 1. We suspect further downward revisions are likely.
Looking up north, it wasn’t just the U.S. consumer who stepped back from buying with disappointing retail sales as Canadian retail sales missed badly, falling 0.8% versus expectations for a 0.1% decline. Over in the land of bronze, silver and gold dreams, South Korean exports declined 3.9% year-over-year.
Wednesday’s flash PMI’s were all pretty much a miss to the downside. Eurozone Manufacturing PMI for February declined more than was expected to 58.5 from 59.6 in January versus expectations for 59.2. Same goes for Services which dropped to 56.7 from 58 versus expectations for 57.7. France and Germany also saw both their manufacturing and services PMIs decline more than expected in February. The U.K. saw its unemployment rate rise unexpectedly to 4.4% from 4.3%
The Bottom Line
Economic acceleration and rising inflation aren’t showing up to the degree that was expected, and this was a market priced for perfection. The Federal Reserve is giving indications that it will not be providing the same kind of downside protection that asset prices have enjoyed since the crisis, pushing markets to reprice risk and question the priced-to-perfection stocks.
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