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With all the good news going around the world about Bitcoin, there is a massive risk going on right now. A risk that not many people are fully aware of. This risk could not only impact on the network’s security and scalability but also further enrage regulators and the general public. In this article we will take a look at what possibly could bring BTC into this position and whether this really could happen.
Starting off, lets look at the current problem. When was the last time you looked at your electricity bill? Depending on where you are in the world right now, but it is very likely to have shot up tremendously. It seems like the whole world is going through a massive energy crisis which the world did not see in decades.
This crisis is hitting particular countries more than others. Where I currently live the problem is very acute. The gas prices on the continent have shot up over 400% over the year. What comes with that is that a lot of electricity companies goes bankrupt which causes the supply of electricity go down which also makes the price of electricity rise.
It seems like while everybody was focused on the China-Evergrande story the energy crisis sneaked up and hit us from the back. Staying in China, this led to necessity of rationalize the energy between different provinces and industries. Apparently, workers were ordered to take the stairs and manufacturers were forced to cut the production drastically in the lead up to Christmas. This left some households for days without power. To wrap up the problem: The world is facing a massive energy crisis and the winter in the northern hemisphere is around the corner.
Now that we understand the problem, the next interesting questions would be: How did we get here? There are several reasons why this problem occurred. Some of them are structural whereas others are driven by the severe impact that the COVID pandemic has had on the global markets. If we take a closer look at the latter one it becomes clear why we are facing this energy crisis.
When it comes to power companies, they have to invest in order to meet the potential demand that they foresee in the future for them to generate a return on their investment. During the pandemic lockdown last year, the economic activity fell drastically. Therefore, the demand for power also fell dramatically. Many of these power companies assumed that this low demand would be a sustained one as economies struggled to recover from the COVID hit. As a result of this, there was very little investment into sustainable energy sources. With banks not willing to invest more money in such activities this lead to a downwards spiral. This brought us into the situation where power generation capacity was at very low levels coming out of the lockdowns.
However, when the world came out of the lockdowns, the demand for energy shot up to the moon. The situation was as follows: increasing demand with very reduced supplies which is the perfect situation for the increasing prices we are currently experiencing. Unfortunately, the power crisis goes way deeper than that. This can be tracked back to some of the policy decisions made over the past decade by many countries facing this crisis. A good example is Europe where they are trying to eliminate perfectly good and green nuclear energy as a result of the Fukushima incident. While it is very dangerous to have these nuclear power plants around in areas with high risk of earthquakes and tsunamis, Europe is not known for such incidents. Chernobyl being the big exception, but this accident happened because of human failure in nuclear plant which didn’t meet the safety standard of today’s time. Nevertheless, by eliminating these kind of energy sources and not adding additional energy sources, this lead to a over reliance on gas which is now short of supply.
Now that I outlined the current global problems, we have to ask ourselves: What does it have to do with our precious Bitcoin? As most of you probably know, Bitcoin is mined in BTC rigs which are basically a lot of computers. These computers are obviously run with electricity, a lot of electricity. In fact the power needed to mine Bitcoin in a year is more than the demand of numerous countries.
Upon recently this mining used to take place predominantly in China. This was because the coal power that was generated in China was incredibly cheap. This changed last summer when China cracked down on almost all of crypto activity in its country. This has lead to a massive exodus of these miners away from China. These miners are now moving towards Texas into the United States. This obviously has lead to an increase of the Bitcoin production since the miners now have to compete for resources with other industries. So what we have now is that these mining companies have a increasing cost of production. These reduce the profitability of the miners and make it less appealing to run these machines. If there is a point where mining BTC starts getting unprofitable, the marginal miners will switch off their machines. This means fewer miners are securing the network and the hash rate would fall.
However, it is not the increasing costs that the miners and BTC holders should worry about. The more dangerous scenario is to be completely shut out of the energy grid. No society wants to see people suffering or even dying because of a lack of power to heat their homes. This means, that if we get into a situation in which energy becomes incredibly scarce, governments won’t just allow prices to rise in response. They will begin to ration the power, and this will mean that those industries that are not seen as critical will get excluded. Unfortunately, in the list of essential industries, BTC mining is probably found somewhere around the bottom.
In fact, if we look at the past months we can see just how bad the perception is by politicians and the general public about wasteful cryptocurrency mining. Of course, some of these news are incredibly wrong, because these miners tend to use the cheapest energy to mine to increase their profits. In fact, the cheapest energy around is renewable energy as can be seen by the example of El Salvador which are using volcanoes to mine BTC. Nevertheless, Bitcoin has a hard standing with those kind of facts which does not make the situation better for Bitcoin.
So how likely is it that we might experience the described situation? It all depends how cold the winter is going to be that we will face. It is very hard to tell at the moment. However, it is anywhere near as cold as last year, we could be in trouble. Lets assume this case would happen: we have an energy crisis and the power is rationed. Bitcoin miners are forced to shut down their operations or at least operate at staged intervals. What would the impact be?
The immediate impact would be a drastic fall in hash rate. This means that there is less mining power available in order to propagate blocks. Generally, when there is a fall in hash rate, the difficulty to mine falls as well. This would allow more marginal miners to join as the profitability increases. However, this can not happen if they are not allowed to switch on their machines. When the hash rate stays low for a longer period of time this could bring the network to a crawl and would sky rocket the transaction costs. These events could seriously affect Bitcoin’s ability to be used as a medium of exchange. Furthermore, hash rate is essential to keep the network secure. The lower the hash rate the less secure the network is from a minor take over. All of the mentioned points could be the end for the crypto cull market that we are experiencing right now.
Or could it? Lets stop for a minute with all of these negative thoughts and take a look on the positive side of things. Now while this crisis is very concerning there is a silver lining here. This is why one of the biggest impact this energy crisis could have is even more inflation. This is caused by the easy-money-printing by the governments. It looks like we will experience a long and persistent inflation over the next years. To make things worse is that the growth of the industries and economies around the world seem to stagnate. This leads us in the situation with hot inflation and limited growth. This is some bad news for the overall economy, but we will look at it from the crypto perspective.
In this environment of high inflation, people are searching for stores of value and hedges. While many think that this would be the role that gold would fulfill, crypto seems to be on the rise. This means that if we could see the catastrophe playing out as I described it above this could lead to a massive run on BTC which would sky rocket the price of Bitcoin.
A few closing thoughts on this article. I really hope that we will not experience such a scenario where the power has to be rationed. I think that the negatives will severely outweigh the positives of such a scenario. While it would slow down the mass adoption of crypto, I do not think that it would cause a destruction or even elimination of crypto. If the prices would suddenly drop this would only mean one thing: Buy the dip. Since more and more institutions see BTC as an inflation hedge this could be a good time to stack for the next bull market.
What do you guys think? Is this scenario realistic? And what is your approach towards these times?