Bitcoin at 50k USD

In March 2018 I posted a Finextra blog “Bitcoin at 50,000 USD”. It was framed as a scenario rather than a prediction and I observed that no-one could possibly know with any certainty what would happen next with Bitcoin. However, the objective of the blog was to examine what Bitcoin and the crypto landscape would look like should Bitcoin reach $50k.

Bitcoin has now reached $50k, on 17 Feb 2020, so in this blog I compare the picture I painted in 2018 with the reality of today.

Scale and Scope

Firstly, I said Bitcoin’s network value, or market cap, would be at least $850bn, compared to ~$141bn at the time. Today it is in fact much higher at around $960bn. $85bn of this rise is due to the additional 1.7m Bitcoins mined since then, the remainder is due to the price appreciation from around $8k per bitcoin in Mar 18.

I estimated the whole cryptocurrency market would be worth over $2trn (up from ~$317bn across about 1,500 cryptocurrencies). The total cryptocurrency/digital asset market value today is lower than my estimate, at $1.5trn, reflecting that Bitcoin has increased its market share, or dominance from 44% to 61%, even though the total number of cryptocurrencies has expanded almost six-fold to 8,490.

At the time, it was unclear which use cases were driving demand for Bitcoin. I said that if the price kept rising, this demand and genuine uses would become clearer, and I listed out a few, such as payments, utility and funding. In reality, the key drivers of demand, especially in the past year have been as a (speculative) store of value, and DeFi (distributed finance - which among other things allows for lending using cryptocurrency).

Regulators

I made the fairly obvious observation that a continued rise to $50k would force regulators to act, with expected regulation likely anywhere along the spectrum from prevention to containment to support. I highlighted Switzerland as an example jurisdiction supporting crypto, and this has continued, while countries such as India, Russia and Vietnam have leaned towards the prevention end of the range.

However, although there has been much regulatory interest in crypto in the past three years, actions have been fairly muted, mainly focused on enforcing AML and KYC on crypto exchanges, providing some clarity on tax treatments, and more recently (in the US) on clarifying banks can provide custody for crypto, and banking services to crypto companies. Perhaps regulators have been unconcerned because for most of this time Bitcoin fell in value, averaging $7k between Mar 18 and Mar 20 before reaching a low of $5k, since when it has risen ten-fold.

Computing Power

In March  2018 there were around 12,000 nodes (servers) on the Bitcoin network. A small subset of these are miners, the rest act as independent validators in the consensus process. I expected this number to double, reflecting the increase in network activity and innovation. However, the number has in fact fallen to 9,845 nodes today. As the network gets bigger, validator nodes get harder to set up and operate particularly for individuals and small organisations, which may account for the decline.

The computing power of the Bitcoin network is measured in terms of the hashing power of the Bitcoin miners. I had a hypothesis that the hashing power in the Bitcoin network is correlated to its market cap, and using this I estimated that at a $850bn market cap, Bitcoin’s hashing power would be in the region of 110bn giga hashes per second, five times higher than in Mar 18. In reality, the correlation over the past three years has been weak, and although the hash rate today is about 154 giga hashes per second, a six-fold increase, it masks the fact it has increased fairly steadily over the whole three years unlike Bitcoin’s price which has risen mainly in the past year.

Electricity Consumption

The electricity consumption of the Bitcoin network is becoming a key topic today. Three years ago, I quoted estimates from Digiconomist that the Bitcoin network required 56 terawatt hours annually, on a par with that consumed by countries such as Sweden, Norway or Malaysia. From this, I calculated that on reaching 110bn gh/s computing power, allowing for Moore’s law, 125 twh of electricity would be needed to power the Bitcoin network when the price reached $50k. In fact, today Digiconomist estimates the current network energy consumption is 78twh, an increase of 39% over three years, compared to the six-fold increase in computing power on the Bitcoin network. This shows that the network is becoming significantly more efficient over time, in fact an improvement of 340% in terms of hash power/energy consumed, a direct consequence of the competitive economics of the network driving efficiency.

Generally, I expect we will hear a lot more on Bitcoin energy consumption over the next few years, especially in relation to renewable energy*.

Miners Revenue

Three years ago, total miners revenue was running at about $17m per day, and I estimated that at $50k/btc, this revenue would rise to at least $90m/day based on the block reward rate at the time (which has since halved). I overestimated this as well, with miners revenue currently at around $43m/day, just below its all-time high of $53m/day a week ago. This means that the miners revenue per hash power unit has dropped around 60% over three years, illustrating network economics are driving energy efficiency in miners operations.

Conclusion

Three years ago, I observed that Bitcoin was the leading cryptocurrency, but it was being overwhelmed in terms of numbers and scope by new ones appearing every day. This is still true in terms of the number of cryptocurrencies and the scope of projects they are used in, but in terms of value, Bitcoin has increased its dominance, indicating it has gained in strength and solidified its role as a digital asset.

I also observed that digital assets were an ill-defined domain emerging in financial services, but one that would have clearer uses over time. That is indeed happening, with Bitcoin’s value being driven up by its emerging role as a store of value, albeit a speculative one, and by the DeFi projects on other blockchains using Bitcoin (e.g. as collateral).

Indeed, it is possible we are seeing the birth of a new system of distributed finance to support a borderless, digital economy, with Bitcoin at its core acting as an immutable store of value providing censorship-resistant collateral for lending, settlement liquidity, payments and other services for a myriad of other digital assets and blockchains as they serve this new digital economy.

I suppose this begs the question of what will this new system of distributed of finance look like if Bitcoin were to rise now to $500k, or indeed fall back to say $5k (which must be a real possibility given its history)? Again, as I said before, it is impossible to know, but given the trajectory over the past three years it is likely we will see some significant innovation across many types of digital assets over the next three.

There is no doubt this is an exciting domain at an exciting stage of its development. As I advised in 2018, it is best to keep an open mind, and watch this new emerging domain continue to unfold – and expect to be surprised.

Data sources: blockchain.info, coinmarketcap.com, bitnodes.earn.com, digiconomist.net

*Bitcoin and Renewable Energy

The proportion of electricity consumed through renewable energy is important – there is no reliable information on how this has changed over the years, but I would guess the economic incentives may also be driving up the renewable energy proportion. Bitcoin mining could even be used to make new renewable energy investments economically viable (as seems to be the case in Iceland). Mining hash power will always gravitate towards miners with the lowest energy costs, both in immediate mining and in the long term, and the cheapest electricity is usually available when supply exceeds demand. Electricity generated in fossil fuel powerstations is adjusted to match supply to demand, so excess fossil-electricity production is limited compared to renewable energy where supply is at the mercy of Mother Nature and can have regular periods when it is in excess of demand – this is why Bitcoin is sometimes called a “value battery”, converting excess electricity energy that would otherwise be wasted into stored value.