Is the Bitcoin bubble set to burst?


Following a blockbuster start to the year for cryptocurrency, Business Leader spoke to some experts about the dangers currently surrounding Bitcoin and what we can expect to see in 2021.

EXANTE CEO, Alexey Kirienko says that markets are heading for a massive correction as interest rates rise and investors move from growth to value stocks.

He said: “We are witnessing a reflationary trade right now, not an inflation-seeking refuge. This is reminiscent of 2011, when the world was on the path of confident recovery. Now everything has happened faster, and a consequence of it is the rapid loss of interest in gold.

“The shift from growth stocks to value stocks, on the contrary, is only at the very beginning of the path, which is unlikely to be smooth. The Nasdaq has fared worse than the Dow Jones last month. This trend could continue as interest rates rise, making it harder for growing companies to borrow in the markets. Now we see tug of war between believers in cryptocurrencies and high correlation financial assets and cryptomarket.

“Bitcoin has finally overheated after growing almost six times  since October. Its growth was further fueled by Elon Musk’s tweets. Nevertheless, short-term movements like the current BTC correction are associated with the psychology of the crowd: some investors have decided to withdraw their profit. Also some funds investing in bitcoin are experiencing a massive outflow of money in recent days. It indicates a temporary increase in bitcoin sales but shouldn’t be considered as a global reverse of the growing trend in cryptocurrencies.

“Gold peaked in August and also looked quite overbought. Then we saw a series of disappointing reports on the cooling demand for it after the boom in 2020. At the same time, the rise in bond yields reduced the attractiveness of investing in low-profit gold.”

Bitcoin’s growth leads to 20x higher transaction fees as mining power grows by 38%

Data presented by cryptocurrency trading simulator Crypto Parrot indicates that Bitcoin’s fees per transaction has grown at least 20 fold. The growth was recorded between February 2020 and February 2021 on a 30-day average.

Rising transaction fees correlates with increase in BTC price  

In February last year, the fee was at $0.6, while on February 8, 2021, the fee was at $12.46, representing a growth of 1,976.66%. On a year-to-date basis, the fee has grown by 81.1%.

The increase in the Bitcoin transaction fee correlates with the asset’s recent surge in value.

The report explores the drivers behind the rise in transaction fees. According to the research report: “The surge in the asset’s value resulted in most people buying Bitcoin in a bid not to miss out on the rally. When prices surge, more potential investors show interest in buying Bitcoin since the fear of missing out (FOMO) usually sets in. In this case, the Bitcoin blockchain often gets congested as miners compete to process the transactions leading to a skyrocketing of fees.”

The transaction fees’ growth also reflects on the Bitcoin network’s total hash rate on a 30-day average. The analysis shows that the hash rate has grown from 109.7 million TH/s as of February 2020 to 151.7 million TH/s, representing a growth of 38.28% over the last 12 months. The hash rate has grown by 11.38% year-to-date.

The hash rate is the processing power of the Bitcoin network or the speed at which miners are able to perform proof-of-work calculations per second. Typically, the higher the hash rate, the more miners are participating in the network. As a result, more blocks are being mined reflecting the asset’s increasing price.

Environmental myths about Bitcoin debunked

Peter Howson, Senior Lecturer in International Development, Northumbria University, explores environmental myths around cryptocurrency.

The price of bitcoin has reached US$50,000 (£36,095) – another all-time high. It’s hard to believe that 10,000 bitcoin would only buy a couple of pizzas ten years ago. It’s even stranger to think that bitcoins are completely virtual. You can’t hold one, except on a hard drive, and there’s no underlying asset to them. A bitcoin is simply a digital representation of the computer power needed to make one, what’s called its “proof-of-work”.

This isn’t actually a new idea though. Rai stones were one of the first forms of money used on the Micronesian islands of Yap. To get hold of a Rai, you had to row a canoe for 500km or so to Palau and chisel away at some local limestone. Then you needed to take the 3m-wide lump of rock back to Yap without sinking in the Pacific. No one is quite sure when it started, but the practice is at least several centuries old. Yapese money had no inherent value. For everyone to respect the proof-of-work, the process was deliberately inefficient and incredibly resource-intensive, just like bitcoin.

Instead of relying on intrepid voyagers, bitcoin uses a global network of competing computers. Like safe crackers at a safe-cracking contest, these bitcoin mining machines guess the combination to a digital lock (a long string of digits) with the correct combination winning a few new bitcoins. The combination changes every ten minutes, and the contest continues.

This might all sound like a harmless game of digital bingo. But with more and more people enticed by the heady rewards, bitcoin mining on some days uses as much energy as Poland and generates 37 million tonnes of CO2 each year.

New institutional investors, like the carmaker, Tesla, are driving the asset’s price skywards while ignoring bitcoin’s climate-changing appetite. And to keep the bull market charging, supporters are working hard to argue for bitcoin’s green credentials.

For the sake of a stable climate, these myths need debunking.

Myth one: bitcoin mining is becoming more efficient

Bitcoin’s carbon emissions are not the network’s only dirty secret. In 2011, competing miners could win the bitcoin bingo with an average laptop. Today, viable operations require investing in warehouses filled with specialised hardware known as Application Specific Integrated Circuits (ASIC). As the majority of mining costs come from energy to run these units, bitcoin miners are always careful to use the cheapest. To avoid wasting energy, the global arms race for bitcoin requires ASICs to be replaced for newer and more efficient models every year.

ASICs can’t be easily repurposed for general computing. Redundant units create around 11,500 tonnes of hazardous electronic waste each year, much of which is dumped on cities in the global south.

Myth two: bitcoin encourages investment in clean energy

Chinese hydroelectric power plants are popular spots for bitcoin mining. While China cracks down on the industry, 61% of bitcoin mining is powered by fossil fuels.

Cheap coal in Australia has found new buyers through bitcoin, as formerly redundant coal mines are reopened to power mining. Miners are willing to move anywhere for residual energy, increasing the profitability of natural gas in Siberia and supporting oil drilling in Texas.

In Virunga National Park in the Democratic Republic of Congo, bitcoin miners are getting special access to cheap, clean energy produced by an EU-funded hydroelectric plant. The plant was designed to help locals find livelihoods beyond poaching and stop them resorting to scouring parkland for wood fuel. Bitcoin miners employ armies of computer servers, not the ex-combatants the plant could help.

Myth three: bitcoin replaces the need for gold mining

Gold mining is one of the world’s most destructive industries. Bitcoin was originally intended as a digital replacement for gold that was also a deflationary means of exchange, capable of rendering wasteful banks and regulators redundant.

But for many institutional investors, gold is being bought to hedge against bitcoin’s volatility. Tesla poured US$1.5 billion into bitcoin, but also declared an interest in gold. While bitcoin is currently experiencing all-time price highs, gold hit one of its own in 2020.

Nor has bitcoin displaced traditional finance institutions. Major banks are vying to get very rich indeed on the back of it.

Myth four: corporate players will boost market for ‘green bitcoin’

Some argue that institutional investors can turn bitcoin green. Yves Bennaim, the founder of Swiss cryptocurrency think tank 2B4CH, claims that as investors like Tesla push prices up, “there will be more incentive to make investments in renewable sources of energy” for bitcoin mining. But miners will always use the cheapest option to maximise returns. It’s not possible to allocate additional rewards to miners using renewables, because it’s difficult to know exactly which bitcoin miners use renewables.

Unfortunately, there is currently no such thing as a “green bitcoin”.

Not all cryptocurrencies are as energy-intensive as bitcoin, though. There are alternatives to proof-of-work. The second biggest blockchain project, ethereum, is switching to proof-of-stake, a new system which is supposed to remove the need for data miners and perpetual hardware updates. Bitcoins are dirty things, but pointing this out to would-be investors should not mean throwing the blockchain baby out with bitcoin’s bath water.

The role of Elon Musk and Tesla

Business Leader analysed the impact of Elon Musk’s investment in cryptocurrency, through Tesla, and the affect it has had on the industry.

To read the analysis, click here.