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Denis Oevermann
Investment Analyst / Crypto Researcher
Bitcoin becoming economically sustainable, potential miner exodus 2.0 and the decline of the banking industry
May 5, 2023 - 6 min read
1. A path for an economically sustainable Bitcoin
The Facts:
- After the launch of Ordinals and thus NFTs on Bitcoin, the number of transactions revolving around NFTs recently surpassed the amount of native BTC transactions on the Bitcoin network.
- A total of 100 BTC (~$2.8 million) in additional fee revenue has been generated through the BRC-20 token transactions (standard tokens for Bitcoin, analogous to ERC-20 tokens on Ethereum).
- In the past week, roughly half of all Bitcoin transactions have been involving BRC-20 token transactions, causing a new all-time high of daily transactions for Bitcoin on April 29.
Our Take:
- The main benefit of additional transactions and activity on Bitcoin lies in it being a potential remedy to what might be deemed a flaw for Bitcoin’s monetary policy in the long run.
- Due to the decreasing issuance of new BTC throughout the halving events, critics have warned, that once mining rewards decline and dry out, there is low incentives for miners to continue securing the network.
- Apart from an increasing BTC price, which compensates for the declining BTC mining revenue, the only alternative is an increase in transaction fees generated, in order to reward miners for their efforts.
- With the recent increase and traction on Bitcoin in the form of NFTs, and other forms of media being inscribed into its blocks, we might see further organic usage of the network continuing to develop.
- Going forward, increased usage, whether through NFTs or increased smart contract usage through the Lightning Network or Stacks, will certainly enable the Bitcoin network to become more economically sustainable in the long run.
2. Will we see a miner exodus 2.0?
The Facts:
- The United States’ Digital Asset Mining Energy (DAME) tax will impose a 30% additional tax on crypto miners’ energy costs if passed into law, implying miners would have face 30% higher energy costs simply due to being in the crypto asset industry.
- The “climate change” tax had been first proposed on March 9, in an annual budget plan that seeks to generate an additional $3.5 billion in tax revenue over the next decade by punishing crypto miners through industry restraints.
Our Take:
- The renewed push by the Biden administrations’ crypto miner tax comes amidst the ongoing War on Crypto, also referred to as Operation Chokepoint 2.0, in an attempt to slow industry adoption and mitigate threats of financial disintermediation posed by the crypto industry.
- Despite the administration’s claims that crypto miners “do not have to pay for the full cost they impose on others” due to “environmental pollution” and “causing higher energy prices” for others, crypto mining in fact uses 58.9% sustainable energy, making it one of the most “green” investments to date.
- Furthermore, crypto mining itself is incentivized to seek cheap energy sources, which usually are renewable by nature, while it in fact helped stabilize energy grids such as in Texas, due to being able to use energy variably.
- The current tax, if imposed, will make mining in the U.S. substantially less profitable, and even unprofitable for some miners, causing them to shut down operations and move to more friendly and neutral jurisdictions, as happened during the great miner exodus from China in 2021.
- Though the consequence has been a subsequent decline in hash rates and network robustness in 2021, the final outcome has in fact been a more robust network.
- Overall, decentralization increased globally, as miners were forced to redistribute, ironically as a consequence of centralized institutions trying to get a hold of the crypto asset industry in an attempt to control it.
- Whether the tax will be imposed or not, we do not see the current tax threats on the crypto mining industry in the U.S., under the banner of climate hysteria, to affect the industry negatively, but rather positively.
58.9%
Amount of sustainable energy used out of the total energy consumed for Bitcoin mining, making crypto mining one of the most “sustainable” and green industries overall.
Plotting Bitcoin’s energy usage versus other industries
(Data) The Block, Digiconomist, Ethereum.org (Chart) Bitcoin Suisse Research
3. Bank industry decline in progress
The Facts:
- Following the reported financial troubles of First Republic Bank (FRB) and the U.S. debt ceiling crisis in our last edition, FRB was seized by U.S. regulators and subsequently acquired by J.P. Morgan this week.
- FRB is a regional bank, that is mainly focused on mortgage loans, and the third bank in less than two months that failed, after it has been unable to match customers withdrawing the deposits that they made.
- FRB is the third bank failure this year, that is larger than the largest single bank’s failure in the 2008 financial crisis.
- While J.P. Morgan acquired all assets, the losses will be shared equally between the FDIC (Federal Deposit Insurance Corporation) as well as J.P. Morgan, which account for roughly 10% of the entire FDIC’s funds available for bank bailouts.
Our Take:
- Though in the case of the First Republic Bank a “classical bailout” has been avoided, the acquisition by J.P. Morgan will cause further consolidation and centralization of the banking landscape.
- FRB’s branches will be rebranded to J.P. Morgan, and cause already existing “mega banks” to increase in size, in a continuous process of small banks being acquired by larger banks.
- Comparable incidents are even the mergers amongst mega banks that failed, as outlined in our recent Credit Suisse and The Case for Crypto statement.
- The consequence is ever larger “too big to fail” banks, that become increasingly centralized, contrary to a decentralized network of locally oriented regional banks.
- Ironically, the reason for most banks failing at current times is cause by a credit contraction and drying up of lending and lending facilities overall, which causes banks to stumble in the current inflationary monetary system, which largely “requires” credit expansions in order to avoid insolvencies.
- The solutions to the banks that failed and might still fail due to this mechanism, is either a bailout by the FED, or an acquisition by other mega banks, are simultaneously the major shareholders and thus owners of the FED itself.
- With a rough 1.7 trillion U.S. Dollar in unrealized losses across all U.S. banks, mainly due to rising interest rates, we might see further incidents of centralization and consolidation into fewer and more centrally controlled and dependent banking entities in the future.
As unpleasant as that particular example is, it is, at the most basic level, also the purpose of all taxes: Taxes create demand for a government’s currency, which enables the government to exchange that currency for goods and services.
That is to say: Taxes are what give value to currencies.
Byron Gilliam – via Blockworks newsletter, making the case for how taxes create demand for governments currency, by comparing it to the forced adoption of a colonizer’s currency in its respective colonies, by forcing taxes to be paid in its own currency.
In other news
- FTX to claw back $3.9 billion from Genesis (via UnChained)
- Bhutan’s $500 million crypto mining fund (via The Block)
- Impacts of Kazakhstan’s new mining regulation (via Cryptoslate)
- Ten Days left for the SEC to respond to Coinbase (via Cointelegraph)
- Coinbase stopping new loan issuance (via CoinDesk)
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Denis Oevermann
Investment Analyst / Crypto Researcher