Bankruptcies will continue until morale improves
Plus the mathematical case for nation states to hold bitcoin and Twitter is a dignity trap for billionaires.
Inside this issue:
Bankruptcies will continue until morale improves (reader submitted)
… but wait, there’s more! and more! and more!
Bitcoin as a hedge against international sanctions
Nigeria tightens restrictions on the use of physical cash
Bankruptcies will continue until morale improves
"Hey KF, what is at the end of this death spiral: bitcoin price low, some miners are priced out, price low for long enough they have to shut down, sell mining rigs, dump BTC to stay afloat, price gets lower ... ?" — PS
It is a tough time for Bitcoin miners right now.1 Since the peak of the last bull run in late 2021 the price of Bitcoin has fallen, energy prices have skyrocketed and the hashrate has still continued to climb. That means more miners are competing for a smaller share of the payout (in bitcoin) that is worth less (in dollars) and needs to pay for higher electricity costs (in dollars). A lot of miners have gone or are in the process of going bankrupt as a result. Some of them are selling bitcoin as they do:
It is interesting and in my opinion probably significant that miner capitulation and the ongoing FTX/Alameda debacle don’t seem to have pushed Bitcoin’s price below the levels it has been hovering around since November. Customers deposited ~$1.4B worth of Bitcoin into FTX before it collapsed, but it filed for bankruptcy with literally none on it’s balance sheet — which means FTX effectively sold those coins to prop up the value of the tokens Alameda was using as collateral.
That implies that for quite a while FTX has been actively transforming real organic demand for Bitcoin into artificial demand for competing cryptocurrency assets. The FTX fraud was probably actively suppressing the price of both BTC and ETH. That doesn’t mean the next bull run is around the corner — the damage created by FTX was very real even if the counterfeit Bitcoin it sold to customers was not. There is no reason to think a wave of new Bitcoin adoption is on the horizon.
If the price of BTC stays flat and the price of energy stays high (both of which seem likely) the margins for miners will stay compressed. More Bitcoin miners will probably go bankrupt — but that doesn’t necessarily mean hashrate will go down. Unprofitable mining equipment is just sold down the line to someone else with cheaper electricity. Mining rigs don’t have any other use besides mining Bitcoin, so even if the price drops dramatically the most valuable thing to do with them is just to sell them to someone else who can use them to mine Bitcoin. Hashrate generally only exits the network completely when the hardware is worn out and useless. So difficulty will likely stay high and might even continue increasing.
This is all very bad news for many mining companies (some of whom will go bankrupt) but it is good news for a handful of mining companies who are well capitalized enough to expand by buying resources from distressed competitors at steep discounts. This period will likely mark a consolidation of hashrate away from prop mining companies that were functionally long BTC towards more mature and specialized mining operations that are properly hedged against changes in hashrate, energy prices or the price of BTC. The next generation of Bitcoin miners will likely be more stable but may be less naturally aligned to the interests of the network.
… but wait, there’s more! and more! and more!
I refuse to let the FTX story continue to dominate the newsletter entirely but there is obviously still a lot unfolding. Prosecutors have started to formally build cases for fraud (stealing customer funds at FTX) and market manipulation (for causing the Terra/Luna depeg). The latter is especially interesting since it implies that former FTX CEO and world’s least popular vegan Sam Bankman-Fried set in motion the chain of events that ultimately blew up his own position. Here’s a good thread about why it takes so long to actually charge white collar criminals.
Cryptocurrency news site Coindesk (who broke the original story about the Alameda balance sheet) drove such an explosive unwinding in the markets that their parent company DCG is teetering on the brink of insolvency and will probably have to sell Coindesk. Even worse the CEO of major competing outlet The Block stepped down after Axios revealed he had accepted millions of dollars in secret loans from SBF, brutally tarnishing The Block’s journalistic reputation.2
Meanwhile traditional outlets like Bloomberg and the NYTimes have filed a court motion seeking to doxx the confidential information of FTX creditors, including individual retail FTX customers. The hazards of involuntarily sharing people’s names, addresses and FTX account balances are apparently outweighed in their opinions by the public’s need to dunk on people who have already lost money.
The cofounders of Three Arrows Capital, Kyle Davies and Zhu Su are taking advantage of the relative insignificance of their crimes to attempt a redemption arc. Don’t let the existence of staggeringly enormous crimes trick you into sympathizing with the criminals behind extremely large crimes. Here’s a good thread recapping why Kyle Davies and Zhu Su are still massive doucheweasels even in a post-SBF landscape.
Politicians have started taking advantage of the narrative momentum to introduce thoughtless legislation to fix what they assume must be the problems. Rep. Maxine Waters invited SBF to testify before congress, he politely declined, she sternly insisted, he reluctantly agreed. Testimony is scheduled for the 13th. All of this back-and-forth took place on Twitter, which is I guess where these things happen now? Another thing that is happening on Twitter is that SBF and CZ are bickering like children. Twitter is basically just a dignity trap for billionaires.
More interestingly the US and the Bahamas are bickering over bankruptcy jurisdiction for FTX, which will likely be expensive and time-consuming for FTX’s creditors to get resolution on. Still, it’s probably better than what happened to the NFTs that artists created using the FTX NFT platform:
Other things happening right now:
We talked recently about the Nigerian people’s lack of interest in the official Nigerian central bank digital currency (CBDC), the eNaira. In spite of government attempts to drive adoption only ~0.5% of Nigerians use the eNaira (compared to more than ~20% of the population that uses Bitcoin). In a last ditch effort to force the issue Nigeria is starting to lock down use of physical cash by restricting ATM withdrawals to 100,000 NGN/day (~$225 USD).
Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves is an interesting macroeconomics paper from Harvard that uses Bayesian modeling to argue nation states should reduce their demand for US Treasuries and stockpile Bitcoin and gold instead as a means of reducing the effective leverage of potential economic sanctions in the future. The author concludes the increased political use of economic sanctions increases the long-run fundamental value proposition of both Bitcoin and gold.
On a completely unrelated note the government of Ghana is now formally requiring private mining companies to sell ~20% of their refined gold directly to the Ghanaian government rather than on the open market. Ghana is the second largest producer of gold in Africa.
This is fine, right? This is probably fine.
Disclaimer: I work for Blockstream, which is (among many other things) a Bitcoin miner. My job is only tangentially related to the mining side of the business.
Take a moment to consider the tragic tale of Larry Cermak, VP of Research at The Block. Larry was one of the last, most vocal defenders of FTX and lost a sizeable amount of his own money in the collapse. Later while reporting on the events he painstakingly annotated all 470 of the Alameda "investments" only for it to be revealed that some of the items on that list were the secret loans to his boss. For years FTX was secretly paying Cermak’s salary using his own stolen money and he accidentally broke the story on himself.