Macro Economic Uncertainty & Stores of Value
The events of 2020 have provided a stark reminder that financial markets move very fast. As financial decision makers respond to the current economic recession, the situation is further complicated by systemic long term debts between nation states, banks, and other financial institutions serving corporate and institutional finance departments. Under these extreme conditions, financial decision makers continue to ask themselves where they can allocate capital in the face of great uncertainty. For the last decade, the answer has increasingly been in hard assets like gold, real estate, and power generation. More recently, we’ve even seen bellwether investor Warren Buffet significantly divest from banks and take a strong position in a cash producing gold mining company. As we’ll explain below, the most exciting and undervalued hard asset investment opportunity appears to be in the bitcoin market.
Institutional Bitcoin Adoption
We often cite Fidelity Investments as an industry leader in institutional bitcoin adoption. The financial services company has been mining bitcoin since 2014 and began providing bitcoin custody services in 2019.
Back in June, Fidelity published results from a survey of nearly 800 institutional investors where 36% of respondents said they are currently invested in digital assets, and 6 out of 10 believe digital assets have a place in their investment portfolio. In a few short years, institutional investors have gone from “should I invest?” to “how much should I invest?”, which is a very positive sign for mining companies who are minting new bitcoin.
In a nod to these survey results, last week Fidelity made news by submitting paperwork to the U.S. Securities and Exchange Commission (SEC) for their first bitcoin focused fund, Wise Origin Bitcoin Fund I, LP, in order to service fast growing institutional demand for the digital asset.
A final noteworthy development in the institutional space is the recent guidance from the U.S. Office of the Comptroller of the Currency (OCC), which confirmed national banks have the right to custody digital assets such as bitcoin for their customers. With this news, it appears that banks are ready to make a big move in the space serving institutional, corporate, and retail customers.
Corporate Bitcoin Adoption
Last month, publicly traded company MicroStrategy (MSTR) announced it had returned $250M, i.e. half of its excess cash, to shareholders. The remaining $250M was used to acquire 21,454 bitcoins at an average price of $11,652 per bitcoin. In a press release, the company referred to bitcoin as a “dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash” and also cited “a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program” as reasons for purchasing the asset.
On a recent powerhouse episode of The Investors Podcast, Jeff Booth, a technology entrepreneur, investor, and chairman of multiple corporate audit committees, stated that following the MicroStrategy announcement holding bitcoin as a corporate reserve asset is a very real conversation in boardrooms “right now” (1:00:00). The podcast also discusses how various economies are leveraging their energy commodities, e.g. oil, gas, uranium, etc., in order to hold and trade assets with less counterparty risk (25:00). This is no surprise, as energy has long been a fungible hard asset used as a monetary backing, store of value, and medium of exchange when other fiat based currencies begin to lose confidence, e.g. the U.S. Petrodollar post 1971.
Global Energy Markets & Bitcoin Mining
At Satoshi Energy, our core thesis is that energy is a fundamental building block of any modern economy and bitcoin as energy backed money enables you to store low value surplus energy in a hard money asset. The fast growing market of bitcoin miners (10GW+) chasing ever cheaper energy to mint new bitcoin is a prime example of our thesis in action. As such, we’re keeping a close eye on all facets of the bitcoin mining market and related energy contracts.
In China’s Sichuan province, a popular location for bitcoin mining, record seasonal monsoons (April through October) have forced hydro plants to stop generating power in order to prevent flooding and catastrophic failure of the dams. As bitcoin miners have been forced to shut down, the bitcoin network has seen a roughly 20% drop in hashrate making all operational miners ~25% more profitable. Additionally, China seems to be reaching a limit on the amount of low cost energy it can provide to bitcoin miners outside of the rainy season, exemplified by a recent move to increase power prices for bitcoin miners in Inner Mongolia. The region typically serves as a second home to bitcoin miners during the dry season (November through March) who utilize the region’s relatively low cost thermal power generation. That was until regulators recently issued a policy requiring the cancellation of preferential electricity prices for bitcoin mining. The move will raise prices for energy in the region by about one third.
Fortunately, the global network of bitcoin miners continues to hum on. This is also a positive sign for U.S. based miners given the vast solar and wind energy resources in the states, which are producing unprecedented amounts of low cost sustainable energy well suited for bitcoin mining. Here at Satoshi Energy, we are working diligently to bring institutional and corporate capital into the bitcoin mining industry as a hard money hedge for current and future sustainable energy projects. We look forward to sharing more updates soon.
Monthly Market Metrics
At the time of writing, bitcoin is:
- 11.663 years old
- $215B market capitalization
- 30.4 million addresses holding a balance
- ~10 GW and ~120 EH/s of globally decentralized data centers backing the currency with low cost surplus energy
Thanks for reading.
Satoshi Energy Corp.