First published Mar'24 - before the halfing
Bitcoin will implode 2027
Facts
If the reward is halving every 4 years then at some stage it will implode. Have tried to be factual, or close enough:
o Ownership: The total number of BTC is limited to 21m coins and there is only about 1.4m left to dish out. Of those out, there many have been hoovered up by single Individuals aka Whales (1.7m), Banks/Companies/Countries (1.2m) and some have been lost forever or remain untouched by the mysterious founder (3.5m). The rest (about ½) are with the General Public or in Crypto exchanges.
o Reward for Maintaining: BTC's are issued randomly, with odds in proportion, to those who participated in the ‘proof of work’ calculations that completion of each Block in the Blockchain. Back in 2009, the reward for ‘mining’ aka servicing the Bitcoin Block chains was 50 BTC per Block. The reward is halved every 210,00 blocks, roughly every 4 years, i.e. 2012 to 25, 2016 to 12.5, 2020 to 6.25 and next month to 3.125 BTC’s per Block. On this cadence the last (partial) BTC will be issued in 2140 but by 2098 only 1 bitcoin would be issued every year… seemingly pointless by then.
o Maintenance costs: One Bitcoin transaction costs up to 1,200kWH of energy just to maintain the blockchain, equivalent to 100,000 VISA transactions. So micro-uses of parts of bitcoin are hopeless efficient. Assuming $0.10 per kWh a Block costs $19,000 to product (Assuming lowest cost in US is North Dakota, average 10.23 cents per kWh). Electricity costs are lower in some other countries, e.g. China but many countries are banning crypto-mining as this use of their resources as it doesn’t add any value to their actually economy.
o Environment: Bitcoin mining consumes upwards of 0.5% of all electricity consumption worldwide. 7 times as much electricity as all Google's global operations. As computers haven’t got faster for a few years now (just getting more cores as industry has moved to mobile efficiency), assume the 190,000 kWh per Block won’t change – so that’s 26 metric tons of CO2 per block x 50,000 blocks per year for a long time… for an intangible digital wealth for a few. And Bitcoin is less than half of the cryptocurrency markets so should assume that there’s a lot more crypto-pollution out there.
o Mining Costs: A ‘bitman $19 Pro Miner (120TH/s)’ costs $2.2k and would take 7 years (14 after the next halving) to create 1 BTC on average. But rewards are random, so large farms are needed to spread the risk. And as well as the capital on the premises, computing units, and the electricity there are other costs like security, cooling and then there’s the expected profit margin. Back-of-the fag-packet maths time. And it will depend on electricity costs and economies of scale, but I’d suggest that all-in costs could be about double the electric. And the cost doubles every 4 years (the halfing) thus the log scale on the chart on the right.
Returns
o Mining Returns: Currently with all the hype is feeding demand that is pushing up the price, keeping current and attracted new miners so ensuring maintenance for the foreseeable future. So as long as the BTC price outperforms the costs and the ‘halving’ then all is good.
o Speculator Returns: 97% of all BTC has been issued, so perhaps the price increases over the last 5, and especially over the last 2 years is around the throttling of supply. In the past prices have gone up after the ‘halfing’ – probably due to new supply being slower, so demand will pay more for current BTC. This time the price has shot up before the ‘halfing’, just like in stocks, the future is priced in now by speculators (banks, whales and micro investors). As about 20% of all currently available BTC are controlled by speculators they have the ability to move the price and benefit from this movement.
Implosion
o Miners. The whole system is held up by the miners, who invest for the medium term – need long enough to mine and sell to cover costs. Perhaps like the OPEC pricing model to ensure continuation of income for a diminishing resource by having an interested in controlling the prices upwards. Perhaps they will demand a separate fee to maintain the Blockchains in the future or just leave.
o Speculators are in for shorter term gains, happy to stay in when prices rise but will want to get out before any crash or series of corrections. Would need to get out carefully or they’ll give the market a cold that might be the start of the end. $44billion of BTC was traded in the last 24hrs, 3% of the total market capitalisation, enough to wash profits through but who-owns-what is watched so anyone exiting will be newsworthy and could become the firing gun of the tipping point.
o Tipping point. There will be a tipping point sometime and those who have divested will walk away unhurt but those are a little too late will feel burnt – some will have got in early and just lost unearned wealth, but late investors will be the profits of other – not to dissimilar to a Pyramid scheme. No one will want to be left behind so after the tipping point it will be something like a run on a bank collapsing.
o Collapse. Like any run on a bank, when it starts, it’ll only go in one direction, perhaps being propped up by those with vested interests but here no government will step in, so will be for the most exposed (slow speculators) or slowest to divest (miners) to sort it out. But as this is gambling and not a proper investment there is no floor on how far this can fall - there is zero inherent value in BTC, just like the NFT fad/mirage/bubble.
o Timing. The clever money won’t wait too long to divest, and must have already started to hedge their position by selling. The charts above give a general rule, of what goes up will come down. I suggest the:
> tipping point for investors will be around 2027 as someone will jump first in this reverse-dutch-auction, unwilling to wait until the ‘halfing.’ On 2028. And the media will do the rest.
> a managed collapse over the 2028 ‘halving’ for a few years as miners exit
> all over by 2034 because if there are no miners, the Blockchain will not be serviced, which will mean no transactions are possible, so anyone holding BTC will find them unusable, aka worthless.
o Environment. So far Bitcoin has created 26 million tons of CO2. If it completes its full 130 year lifecycle this would increase to 185million tons of tons. To put that in perspective, that’s half of the increase in global CO2 between 2022 and 2023. If we need to reduce emissions then I vote to stop cryptocurrencies first.
Current Use
Like all new tech, it’s created by interested geeks and corrupted by crims, before a few bubbles and versions it become socialised and accepted by mainstream use. Right now we can see the main uses and the problems, below… and perhaps some fixes. Right now we’re not interesting in wandering into this wide west swamp:
o Supporting Criminality: Although cryptocurrencies started out in liberal (in the nicest way) theory but in reality are great for those who want to exchange money outside the regulated financial systems. Basically the wild west:
> Blackmail: Most blackmail hackers ask for payment in crypto.
> Scams/Fraud: In 2021 the reported numbers were: Investment Related Fraud (classically with fake celeb endorsement) $575m, Romance Scams $185m, Business & Government imposters $133m. In 2022 this rose to over $1b
> Pump’n’dump aka rug pull: Millions of cryptos have been created but only a fraction (13,000) get any investment, and 2/3rd are now defunct. See the Squid coin scam
o Not Secure:
> Exchanges: Many stories about crypto-wallets being lost or hacked and so many exchanges have failed due to poor security or suspicious financials: Mt. Gox (2014, hacked), Bitinex (2016, hacked), QuadriaCX (2019, lost wallet access + Ponzi), Crytopia (2019, hacked), FTX (2022, fraud). And there are some fake exchanges out there that just take the deposit immediately
> Not needed: Financial security comes from central banks. Compare that to about 180 normal/regulated currencies in the real world, and 75% of all global currency transactions happen with the big 4: US Dollar (44.1%), Euro (16.1%), Japanese Yen (8.4%) and GB Pound (6.4%).
o Learning: Other cryptocurrencies (and there are as many as there are get-rich-quick-shysters and fools) will say they are different but the definition of a bubble is “where investors buy an asset not for its fundamental value, but because they plan to resell, at a higher price, to the next investor.” For me this is when gambling is disguised as investment and media adds to the boiler-room hype, so people spend an awful amount of energy on losing their shirt. The one thing we learn from history is that we don’t learn from history: Tulip mania (1637), South Sea Bubble (1720), Railway mania (1856), Ponzi (1920), Stock Market crashes (1873, 1907, 1929, 1987), Wolf of Wallstreet (1996), Dot-com bubble (2000), Real estate (Japan 1991, US 2006), Madoff (2008), NFT (2023)…. Cryptocurrency (2029?).
Future Use
Energy intensive – most business models look for efficiency, but blockchain is the opposite. There are many eco-friendly cryptocurrencies popping up, the most mainstream will be Ethereum 2.0 will use 99.95% less energy when it is complete sometime in 2024. NB Ethereum is the system on which most NFTs run . Others are Hedera, IOTA, Cardano, Nano and Solarcoin – which might be interesting for you as it’s a reward for solarpanels!
Who are you buying from or selling to?: The desperate or soulless of people are always attracted to quick money from bubbles – the shrewd win and the sheep get slaughtered. There are those who that understand econometrics and trading, some are just gambling but may not know it. But you only hear from the rich and lucky until it’s too late. The question for the stock analyst in you, is how could we define when to buy and sell – what are the triggers? Or is this casino-investing? What markets/questions are out there that combine different aspects of our experiences, skills, maths and humanistic approaches to avoid the pitfalls and skim some extra £?
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