Microstrategy co-founder Michael Sayler, a symbol of pride during the dotcom boom that has since gone full bitcoin, describes the cryptocurrency as follows: “A swarm of cyber hornets serving the goddess of wisdom, the fire of truth.” feeds on, becoming increasingly smarter, faster and stronger behind a wall of encrypted energy.”
cold cold This putter is enough to fan the cultish flames of the laser-eyed crowd and attract junk-bond investors when times are good, liquidity is plentiful and interest rates are at rock bottom. But with rising commodity prices, supply-chain risks and a war in Europe painting a stagnant outlook for the world at large, that burning smell is not from the fire of truth, so much as speculative valuations rising in smoke. Used to be.
Bitcoin’s 50% drop over the past six months highlights its flaws in times of stress: it is an energy void at a time when electricity prices are on the rise and no dividends against the backdrop of rising interest rates around the world. Because central banks work against inflation. It has also started attracting increased regulatory scrutiny. This is on top of large scalability issues that have hindered its adoption in payments, not all of which have been resolved by the Lightning Network appearing in El Salvador. Its pseudonym may be appreciated by cybercriminals, but today people prefer hard cash.
Bitcoin’s promise as an inflation hedge is also waning, as the electricity feeding it becomes more expensive. Electricity accounts for nearly half of mining companies’ overhead expenses, which is what drives the ever-expanding computing resources in bitcoin. While the price of the token is still about twice the breakeven rate of these firms, they have bills to pay and capital expenditures to finance – which means selling bitcoins for dollars.
Miners will also have to plan for alternatives to hotspots such as Texas, a US state where crypto mining requires more electricity than Houston – the fourth most populous city in the US – by mid-2023. Stability was a major factor in the successful proposal of the Wikimedia community to stop accepting crypto donations.
As the need for energy increases, so does the level of demand needed to sustain the price of bitcoin. William Quinn, co-author of Boom and Bust: A Global History of Financial Bubbles, estimated that the bitcoin network burns $32.9 million per day in energy costs, based on February data. It’s probably even more so now. That’s a big enough hole for new punters to fill.
Still, all sellers in the world will never persuade consumers to bet big if their own liabilities are piling up. In a world of expensive necessities, where even a Netflix subscription is becoming a luxury, it’s easy to see why the risk-averse day traders of Coinbase Global or Robinhood Markets are losing sight.
When cash is king, bitcoin looks more like a leveraged gamble than digital gold. Even Microstrategy is feeling the heat of loss allegations as the average purchase price of a bitcoin firm nears $30,700.
what happens next? Crypto promoters acknowledge more short-term pain to come, but also promise that great things will happen to those who hold on to dear life. Early adoption boosters compare the nascent crypto universe to the first days of the Internet.
Now, it’s certainly true that whether it’s boomer hedge-fund managers having a swell time with volatile tokens, or emerging markets with weak governance who embrace crypto as a route to fintech wealth, crypto. Speculative furniture is increasingly part of society.
The 50% drop is around $30,000 for long-term fans of bitcoin, which has gone through several boom-and-bust cycles since its inaugural whitepaper in 2008.
However, adoption of the technology requires the ability to differentiate between crypto’s Googles and Pets.com, and to determine whether bitcoin itself is vulnerable to disruption by rivals in the public or private sector. It also believes that El Salvador’s poor and messy rollout will become an example other nations want to emulate.
And what fans should really worry about is selling pressure on stablecoins like Tether and Terra, which are managed algorithmically or with currency reserves to avoid wild fluctuations in price. If they are being dumped for cash, it is less fuel for the broader crypto market.
Maybe one day the “Fire of Truth” will justify Sayer’s choice. But for the time being, bitcoin is a great way to burn off one’s purchasing power while burning up the planet.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France