Bitcoin is like early electricity. Raw, dangerous, seems very volatile and hard to use. With time it'll start to feel safer, easier and normal. Like electricity it will inspire and power new unimaginable industries. And one day we’ll wonder how did we live without it?
— O₿iWan (@ObiWanKenoBit) October 14, 2020
Bitcoin has had an amazing run in just under 12 years of existence and it’s just getting started. At Satoshi Energy, we expect within 5 years that most energy companies will be mining bitcoin and holding that bitcoin on balance sheet as a fiduciary responsibility to the shareholders. Within 10 to 15 years, we expect bitcoin mining, as the energy buyer of last resort, will be a terawatt sized industry. Let that sink in for a second.
Bitcoin Hashrate & Exchange Rate
Bitcoin’s network hashrate, i.e. total computation securing transactions on the network which rises due to the profit arbitrage opportunity and anticipation of future value stored on the network, hit an all time high last month reaching ~180 EH/s. The rise was followed by a significant drop later in the month due to expiring low cost energy contracts provided by hydro producers during China’s rainy season. By design, bitcoin’s difficulty adjusts to such events by making it either harder or easier to add new blocks to the chain depending on how fast blocks have been added to the chain over the previous 2,016 blocks. This process, known as the difficulty adjustment, keeps bitcoin on target adding new blocks approximately every 10 minutes, thus issuing new bitcoin via the block subsidy and paying fees to miners. The graph below shows significant dips in hashrate this year due to the economic shutdown in March, the bitcoin block subsidy halving in May, and most recently the end of rainy season power contracts in China in October. Each time the difficulty adjusted as planned keeping the block time on the ~10 minute target.
Bitcoin Network Hashrate, EH/s, Statoshi.Info
What this demonstrates is a) inefficient miners and those without flexible energy contracts are priced out of the market each time hashrate goes up or price goes down, and b) there is a massive opportunity for U.S. based mining with abundant low cost renewable energy under flexible energy contracts that are immune to bitcoin price shocks, difficulty adjustments, and block subsidy halvings.
Corporate Adoption
Bitcoin continues to see adoption from corporations looking to the store value they create. Most notably, Square, Inc., known for its widely used Cash App and point of sale systems, announced last month the allocation of $50M, or 1% of its total assets, toward bitcoin. This makes sense given bitcoin’s tech-company-like momentum and tremendous upside potential relative to other assets in which companies can park their profits. Additionally, the company shared an informative and concise report explaining its approach to acquiring and holding bitcoin on their balance sheet.
A key question every corporation needs to be asking now is - how will we allocate funds toward bitcoin without overpaying or drastically increasing the price? One approach is to contract directly with mining companies in the same way corporations purchase energy through physical and virtual power purchase agreements (PPAs). In fact, it’s quite possible to convert your current PPA risk into bitcoin, and we’ll have more to share on this front over the coming months.
Institutional Adoption
Well known institutional investors continue to recommend a percentage portfolio allocation specifically into bitcoin. Check out our newsletter from last month for a brief overview of what makes bitcoin unique relative to other so called “digital currencies”. Recent examples include:
- Stone Ridge Asset Management announced that subsidiary New York Digital Investment Group (NYDIG) is now the custodian of 10,000 BTC valued at $115M at the time of the announcement. Robert Gutman, CEO of NYDIG, stated “We've seen a pretty dramatic acceleration in the count of institutional investors who want to participate in the market since March of this year. The macro backdrop against the public health backdrop has caused a lot of people to rethink their portfolio composition.”
- Fidelity Digital Assets released the second part of their "Bitcoin Investment Thesis" series last month. In the report, the investment firm highlights investors’ rationale for including alternative investments in a portfolio, the growth in appetite for alternative investments , the characteristics of bitcoin that may make it a sustainable portfolio diversifier , and historical analysis of bitcoin’s impact on a portfolio.
- Paul Tudor Jones, American billionaire hedge fund manager, conservationist, and philanthropist, spoke on CNBC last month doubling down on his bitcoin investment thesis stating “I've never seen a store of value where you also have such great intellectual capital behind it. [...] When you short the bond market as an inflation hedge you're really betting on the fallacy of mankind rather than its ingenuity."
- Grayscale, the world’s largest digital currency asset manager, published their latest Bitcoin Investor Study last month, which highlights continued growing interest in bitcoin by institutional investors. Growing from 39% of respondents in 2019 to 55% of respondents in 2020.
- JP Morgan is even joining the party. Only a few years ago the firm referred to bitcoin as a “ponzi scheme”, and now states bitcoin is an alternative to gold among millennials, while suggesting a “doubling or tripling” in the price of the cryptocurrency if current trends continue. Of course, we at Satoshi Energy and many others believe there is far more upside potential than JPM’s analysts have stated.
Finally, an added bonus for institutional investors and corporations looking for a secure digital currency custody provider, is the recent announcement of Avanti Bank & Trust receiving a banking license from the Wyoming State Banking Board. Avanti is run by Wall Street veteran Caitlin Long who is also a founding member of the Wyoming Blockchain Task Force. We're very excited about the firm's approach to building a suite of secure, modern banking services.
Monthly Market Metrics - October 2020
At the time of writing, bitcoin is:
- 11.858 years old
- $276B market capitalization
- 32.5 million addresses holding a non-zero balance
- 156 EH/s (~10GW) of globally decentralized data centers backing the money with low cost surplus energy.
Thank you for reading.
Satoshi Energy Corp.